ERISA Plan Funding
Regarding healthcare coverage, an ERISA Plan can be either “self-funded” or “fully funded”. The Plan documents determine which funding model applies. The Plan Beneficiaries don’t get to choose between self-funded and fully funded.
Self-funded ERISA healthcare Benefit Plans
“Self-funded” means exactly what it says – benefits are paid out of Plan funds.
A self-funded Benefit Plan often has “reinsurance”. Basically, this is insurance for the Plan with a high deductible. So, for instance, the Plan pays out of its own funds the first $15,000 of any claim and if a claim for more than $15,000 comes in, the Plan pays $15,000 and the reinsurer pays the rest.
Reinsurance situations can be particularly problematic for several reasons:
- Obviously, they always involve high-dollar claims.
- Reinsurance is a very narrow, highly-specialized area that few people are familiar with, even among Benefit Administrators.
- The provider may encounter a “Jekyll and Hyde” response – the Plan’s in-house personnel want to “do right by their employee” but the third-party reinsurer, (which rarely actually has to pay) seeks to minimize payment.
- Reinsurers often “pull the strings behind the scenes”, meaning the provider can’t communicate with the person actually making the decisions.
- Reinsurance policy provisions may conflict with Plan provisions, resulting in less reinsurance coverage than the Plan expected or even in no reinsurance coverage.
- Plan personnel will virtually never side with the Plan Beneficiary against the reinsurer.
- Because the reinsurance policy is a contract between the Plan Sponsor and the reinsurer, the Plan Beneficiary has no legal rights directly against the reinsurer.
Fully funded healthcare Plans
“Fully funded” means the Plan buys healthcare insurance from a health insurance company such as Blue Cross, Aetna, CIGNA or United Healthcare. Although the Plan could buy individual policies, normally it buys a single “group insurance policy”, which is generally less expensive.
Differences between self-funded and fully funded
A major difference between self-funded and fully funded is that if coverage is fully funded, state insurance laws such as the Texas Insurance Code apply and if a Plan is self-funded they don’t.
By law, insurance companies are required to maintain certain “financial reserves”, they have to file financial reports with state Insurance Departments, and the state maintains an Insurance Guaranty Fund. If the insurance company runs into financial difficulties, the state will take control of the company and pay claims out of the Insurance Guaranty Fund. However, it usually doesn’t get to that point – the Insurance Department can usually arrange to sell a “distressed company” to some other insurance company, which takes over that company’s business and pays any outstanding claims.
Although in theory self-funded ERISA Plans are supposed to maintain appropriate financial reserves, in practice many Plans pay claims out of the Plan Sponsor’s current business income. There is no Guaranty Fund for self-funded Plans and if the Plan and the Plan Sponsor don’t have enough funds to pay all claims, Plan Beneficiaries sometimes find that the coverage they were promised is not actually available.
Third-Party Administrators (TPA) and Administrative Services Only (ASO)
Just because the name of a recognized insurer such as Blue Cross or Aetna is involved does not automatically mean there is an insurance policy and a Plan is fully funded rather than self-funded.
Many Plans, particularly those with relatively few “covered lives” (Plan Participants), decide that rather than handling healthcare benefit claims in-house, it is simpler and more cost effective to enter into an Administrative Services Only (“ASO”) contract with a company that acts as a Third-Party Administrator (“TPA”).
In addition to having insurance lines of business, many major insurance companies also provide TPA/ASO services. They process healthcare claims but don’t fund them.
Two types of TPA funding
Two methods of TPA funding are common. In one method, the TPA calculates the amount payable and notifies the Plan Administrator, and the Plan Administrator either cuts a check or sends the funds to the TPA and the TPA cuts a check. Then the TPA sends the check to the Provider.
In the second method, the TPA maintains an account into which the Plan Adminstrator makes periodic deposits and the TPA pays claims directly out of that account.
From the Provider’s perspective, a major difference between the two methods is that with the first “individually funded” method the Plan Administrator can delay payment of specific claims simply by not sending the funds to the TPA. In the deposit account method, once the TPA has approved a claim funds are immediately available without inteference by the Plan Administrator.
Network access to PPO’s and/or HMO’s
In addition to getting the TPA’s experience and in-place claims processing system, a TPA normally offers network access to a Participating Provider Organization (PPO) network and/or a Health Maintenance Organization (HMO). This makes available to Plan Participants a wide range of physicians, surgeons, hospitals, hospices, skilled nursing facilities, behavioral health facilities, diagnostic imaging, physical therapy, psychologists, and other health professionals and services.
Also, network access to PPO’s and/or HMO’s means that the Plan can benefit by receiving managed-care discounts from providers contracted with the network, such as physicians, surgeons and hospitals.