Part 2 - The Components of a Self-Funded Plan

This video provides an in-depth explanation of the fundamental components that constitute a self-funded employer health plan, contrasting them with the structure of fully insured plans. The speakers, Pete Doran and Spencer Smith from Pareto Health, aim to simplify the building blocks of self-funding to empower employers, particularly those transitioning from fully insured models, to understand the flexibility and control they gain. The core premise is that the same elements purchased in a fully insured plan—network access, claims processing, and risk mitigation—exist in a self-funded plan, but the employer gains the ability to hand-select vendors for each function, thereby gaining visibility into data and cost drivers.

The discussion outlines four primary components of a self-funded plan. First, the employer must select a Network that best suits their employees. Second, they must hire a Third Party Administrator (TPA), described as the "cardiovascular system" or "heart" of the plan. The TPA is responsible for adjudicating medical claims, applying network discounts, managing cash flows, and submitting bills. Crucially, the TPA facilitates the third component: Data Access. Unlike fully insured plans where data is opaque, self-funding grants the CFO and HR department visibility into exactly how money is being spent, including specific diagnoses and the existence of large claims, enabling proactive large claim management.

The third and increasingly critical component is the Pharmacy Benefit Manager (PBM). The speakers emphasize that pharmacy costs are a massive and growing driver of total plan spend, currently accounting for 30% to 40% and potentially reaching 50% in the near future. This dramatic increase is attributed to specialty drugs and gene therapies, which can cost anywhere from $10,000 to over $50,000 per month. The PBM's role is to manage these pharmacy claims and control these escalating costs, making the selection and management of the PBM a vital strategic decision for employers seeking cost control.

Finally, the video addresses the concept of risk mitigation through Stop-Loss Insurance, which is the "partially self-funded" component that protects employers from catastrophic financial exposure. Stop-loss insurance is a reimbursable contract between the carrier and the employer, limiting top-end risk related to large claims. The employer selects a "specific deductible" (e.g., $50,000), and once a claim exceeds that limit, the stop-loss carrier reimburses the plan for the remainder. This mechanism ensures that employers, even smaller ones, can manage liability, though the premium for this insurance varies based on the employer’s industry (e.g., manufacturing vs. IT) and risk tolerance.

Key Takeaways:

• Self-Funding Components: A self-funded plan requires employers to actively select four key vendors: the Network provider, the Third Party Administrator (TPA), the Pharmacy Benefit Manager (PBM), and the Stop-Loss Insurance carrier.
• Data Visibility as a Core Benefit: The transition to self-funding grants employers (CFOs and HR departments) complete visibility into claims data, including specific diagnoses and large claim occurrences, which is impossible under fully insured models. This data is essential for proactive cost management.
• TPA as the Central Hub: The TPA acts as the operational quarterback, handling all medical claim adjudication, applying network discounts, managing cash flows, and providing the necessary infrastructure for the self-funded plan.
• Escalating Pharmacy Spend: Pharmacy claims are identified as the major driver of rising healthcare costs, currently representing 30% to 40% of total plan spend, with projections suggesting this could soon reach 50%.
• Impact of Specialty Drugs: The primary cause of soaring pharmacy costs is the proliferation of specialty drugs and gene therapies, which often carry price tags ranging from $10,000 to $50,000 or more per month.
• PBM Selection is Critical: Due to the high cost of pharmaceuticals, the Pharmacy Benefit Manager (PBM) is a crucial pillar of the self-funded plan, responsible for managing pharmacy claims and implementing strategies to control drug expenditures.
• Stop-Loss Mitigates Catastrophic Risk: Stop-loss insurance converts a self-funded plan into a "partially self-funded" plan by limiting the employer's top-end financial risk on a per-person basis (specific deductible) or overall.
• Reimbursable Contract Structure: Stop-loss is a reimbursable contract; the employer pays the claim up to the specific deductible, and the carrier then reimburses the plan for the amount exceeding that threshold.
• Risk Premium Variation: Stop-loss premiums are not uniform; they vary significantly based on the employer's industry (e.g., heavy manufacturer vs. IT company), location, and the specific network discounts they utilize.
• Flexibility in Vendor Selection: The key advantage of self-funding is the flexibility to hand-select the best-in-class vendors for each component (Network, TPA, PBM, Stop-Loss), allowing the employer to build a plan tailored to their specific employee needs and cost-control goals.

Key Concepts:

• Self-Funded Plan: An employer-sponsored health plan where the employer assumes the financial risk for paying employee healthcare claims, rather than paying a fixed premium to an insurance carrier.
• Fully Insured Plan: A traditional health plan where the employer pays a fixed premium to an insurance carrier, and the carrier assumes all financial risk for claims.
• TPA (Third Party Administrator): An entity hired by the self-funded employer to handle administrative functions, such as claims processing, eligibility, and billing.
• PBM (Pharmacy Benefit Manager): An entity hired to manage prescription drug benefits, including negotiating discounts with manufacturers and pharmacies, and processing pharmacy claims.
• Stop-Loss Insurance (Reinsurance): A policy purchased by a self-funded employer to protect against catastrophic losses from very large or numerous claims, limiting the employer's financial liability.
• Specific Deductible: The threshold amount for an individual claim that the employer must pay before the stop-loss insurance carrier begins reimbursement.