While group plans are the standard, larger employers have typically had more options for funding their group health coverage. But now even small and medium-sized employers – even companies with fewer than 100 employees – can benefit from alternative funding approaches.

There are three main types of alternative funding strategies that are available to employers:

• Captives
• Private exchanges
• Full and partial self-funding.

Captives

With a captive, multiple employers pool their resources and share the risk in providing health insurance to their employees. It is essentially a self-insured pool built into a captive insurance company (an insurer that is owned by the entity that created it). The captive has staff that will administer the health plan.

Captives are also multi-year agreements, so once an employer commits to make it worth their investment, they need to stick with it for a period of time.

Group captives will often have a specific funding mechanism that is broken down into four layers:

Layer 1: The employer is responsible for the first $25,000 of any claim made by one of its employees.

Layer 2: All employers involved in the captive will share the costs of that claim if it exceeds $25,000, up to $250,000.

Layer 3: For claims that cost more than $250,000, the captive will secure reinsurance coverage to cover amounts above that level. This reinsurance is also called “stop-loss” insurance.

Layer 4: Another layer of protection known as “aggregate stop-loss” coverage protects each employer in the captive for the total claims of their employees, ranging from 115% to 125% of expected claim costs in a year.

Private exchanges

Typically, businesses using a private exchange will offer employees a credit that can be applied toward the purchase of a health plan. Employees can then access a variety of health plans through an online portal and can chose and enroll in plans that meet their needs.

Private exchanges are run by insurance carriers or consultancies, and plans on the exchange are regulated as group coverage. Employees shopping on these exchanges are not eligible for the Affordable Care Act’s tax credits or cost-sharing subsidies.

Most employers currently using private exchanges are large; therefore, most private exchange plans are regulated as large-group coverage and are not part of the ACA’s single risk pool. However, to the extent that smaller employers participate in private exchanges, they are subject to the ACA’s small-group rating regulations and risk-pool requirements.

One of the main features of private exchanges is that they enable employees to comparison-shop among multiple health insurance plans.

Self-insuring

There are many different types of self-insurance, from minimum-premium or risk-sharing arrangements to a fully self-funded plan, in which the employer is responsible for all claims.

Employers can choose from:

Retrospective premium arrangements – The insurer will credit back a portion of the unused premium to the employer (typically as a credit for the following year). This is often used in a fully insured arrangement.

Minimum premium arrangements – The employer pays fixed costs (administration charges, stop-loss insurance and network access fees) and claim costs up to a maximum liability each month.

Partial self-funding -The employer takes on more liability and pays fixed costs (administration, network access, stop-loss premiums and some fees and taxes). It’s partial self-funding because the employer will purchase individual stop-loss insurance, which caps the employer’s liability on any given claim to a certain amount, say $50,000.

That way, the employer is self-insuring most of their employees’ medical needs, but is protected in case some of those claims become catastrophic.

Full self-funding – This is like partial self-funding except that there is no stop-loss insurance and the employer is responsible for all costs that are not shared by its employees.  This kind of arrangement is usually only available to large employers.

The takeaway

These alternative funding approaches are what is available now. But the industry is innovating to making health care and insurance more affordable for all involved.

Employers are entering the second year of open enrollment taking place during the COVID-19 pandemic, which is still having an outsized impact on the process and which has changed the face of health insurance.

There are a number of issues that will have an effect on health plans, including regulations and laws affecting coverage that were born out of the pandemic. Mercer LLC recently published a list of compliance-related priorities that health plan administrators and sponsors have to consider, including:

Legal and regulatory changes

Health plan transparency in coverage rules takes effect on Jan. 1, 2022. Newly introduced regulations require hospitals to publish their standard prices, and for negotiated rates between health plans and providers to be made transparent too.

Employers will need to communicate these changes to their employees, particularly rules that require health plans to provide enrollees with out-of-pocket estimates for upcoming procedures.

Also, the No Surprises Act, which will prohibit surprise bills for certain out-of-network services, takes effect at the start of 2022 for providers and group health plans. Employers need to meet with their plan administrator to make sure that their plans are in compliance with these new regulations.

COVID-19 issues

The pandemic will continue casting its shadow over health insurance and open enrollment.

Legislation passed last year requires health plans to cover additional services such as mental health and telehealth until the end of this year. Whether your plan offerings will keep providing those enhanced benefits or not, you’ll need to communicate that to plan participants and include it in your plan documents.

You should also confirm that your group plans comply with COVID-19 testing and vaccine coverage requirements in the Family First Coronavirus Response Act, the CARES Act and any state laws.

Gender and family planning issues

Employers should review their benefit eligibility rules after the Supreme Court in 2020 ruled that Title VII of the 1965 Civil Rights Act protects LEGBTW employees from discrimination in benefits.

You should ensure that benefits offered to opposite-sex spouses are the same as are offered to same-sex spouses.

Mental health parity

All health plans have to prepare a comparative analysis of their medical and surgical benefits and mental health and substance abuse treatment benefits to demonstrate that treatment limitations are applied comparably. This job does not fall on the employer, but you should make sure your plan has prepared the analysis or is working on it.

This is part of new laws that require health plans to offer similar benefit coverage for mental health and substance abuse treatment as they do for other medical and surgical procedures and services.

HSA, HRA and FSA revisions

The CARES Act temporarily authorized employers to allow employees with health savings accounts, health reimbursement arrangements and flexible spending accounts to make mid-year changes to how much they deposit in those accounts.

It also authorized them to permit employees to roll over unused amounts in their health and dependent-care flexible spending arrangements from 2020 to 2021 and from 2021 to 2022.

Employers that opted to allow their employees to make these changes and roll over funds, have to communicate to their employees that these changes come to an end on Dec. 31 this year.

There were also some permanent changes made by the CARES Act, including reinstating over-the-counter medical products as eligible expenses for HSAs, certain HRAs and FSAs without a prescription.

These accounts may now allow certain menstrual care products, such as tampons, pads, liners and cups, as eligible medical expenses. These are retroactive benefits to Jan. 1, 2020.

Make sure to notify your staff of these changes. You can tell them that if they have receipts for eligible expenses that date back to then, they can submit them for reimbursement.

Out-of-pocket maximums

• Self-only plans — $8,550, up from $8,150 in 2020.
• Family plans — $17,100, up from $16,300 in 2020.
• Health savings account-qualified self-only plans — $7,000, up from $6,900 in 2020.
• HSA-qualified family plans — $14,000, up from $13,800 in 2020.