The History of Self-Funding - Larry Turell

This video provides an in-depth exploration of the history, evolution, and strategic implementation of self-funded employee health insurance plans, featuring industry veteran Larry Turell. Turell, drawing on three decades of experience and the pioneering work of his father, Robert Turell, details how self-funding transitioned from a concept for large corporations to a viable, sophisticated strategy for small to medium-sized businesses (SMBs). The discussion establishes the need for specialized expertise—a "broker's broker"—who can navigate the complexities of underwriting, regulatory changes (like ERISA in 1976), and the design of comprehensive benefit packages that extend beyond medical coverage to include ancillary benefits like dental, vision, life, and disability insurance. A core theme is the necessity of adaptation and continuous education in the rapidly changing health insurance landscape, emphasizing that success relies on deep knowledge and creative problem-solving rather than simply shopping rates.

Turell outlines the mechanical evolution of self-funding, noting the critical introduction of aggregate stop-loss insurance, which was absent in the early days, leading to catastrophic financial failures for some early self-insured associations. He explains that early contracts were pure reimbursement models, lacking modern features like Advanced Specific coverage. The speaker stresses the importance of meticulous field underwriting, a skill taught by his father, which involves analyzing age/sex demographics, location, and regional medical costs to accurately predict risk. This rigorous pre-screening process results in exceptionally high placement ratios (Turell claims 90% closing rate with some carriers) and low loss ratios, earning trust from stop-loss carriers and maximizing client savings. The low loss ratio achieved by Turell’s groups (resulting in a loss ratio modifier bonus from HCC for two years running) serves as a powerful case study for effective risk management in self-funding.

A significant portion of the conversation focuses on overcoming common misconceptions about self-insurance, often stemming from historical failures or lack of transparency. Turell advocates for simplifying the self-funding concept for clients who are not industry experts, using "non-traditional health care" terminology to ease them into the idea. He highlights the power of creativity in plan design, citing an example of successfully underwriting a 150-person group with only 30% participation, which most carriers would reject. Furthermore, Turell discusses the future of healthcare, predicting the decline of traditional large networks in favor of more analytical, cost-saving solutions (like auditing and reference-based pricing models mentioned via a reference to Slingshot) and the potential for a shift in the employer’s onus for healthcare provision. He asserts that a well-structured self-funded plan typically rolls back costs to a three-year baseline and provides long-term stability, with average increases under 10%, significantly lower than fully insured trends.

Key Takeaways: • Deep Underwriting Expertise is Crucial: Successful self-funding requires meticulous field underwriting, analyzing demographics and regional costs to accurately predict risk and ensure high placement rates with stop-loss carriers. This pre-screening minimizes adverse selection and leads to low loss ratios. • Historical Evolution of Self-Funding: The transition from early, risky self-funded plans (lacking aggregate stop-loss) to today’s sophisticated models was driven by the introduction of aggregate and advanced specific coverage, providing necessary safety nets against catastrophic claims. • Overcoming Misconceptions: Brokers must simplify the complex concept of self-funding for employers, often using alternative language (e.g., "non-traditional health care") to counter negative preconceived notions rooted in past failures or lack of understanding. • The Value of the Broker's Broker Model: Specialized consultants (broker's brokers) provide essential expertise in self-funding, allowing retail brokers (who may focus on life insurance or investments) to solidify client relationships and offer comprehensive benefits without needing deep self-funding acumen. • Comprehensive Benefits Strategy: Employee benefits must be viewed holistically, including medical, dental, vision, life, and disability insurance (ancillary benefits). Integrating these components acts as a powerful recruitment and retention tool for employees. • Creativity in Plan Design: Solutions must be tailored; Turell emphasizes that "there's no such word as can't," highlighting the ability to find solutions for complex groups, such as those with low participation rates, that traditional carriers would immediately decline. • Transparency and Education Drive Trust: Clients must be educated on the mechanics of self-funding, including the expectation of higher specific claims in the renewal year following a large claim event (due to paid vs. incurred contracts), to maintain trust and manage expectations. • Future Trend: Network Disruption: The speaker predicts that traditional large PPO networks will diminish in importance as the industry shifts toward data-driven cost control, auditing, and alternative pricing mechanisms to address the broken healthcare system. • Self-Funding Financial Efficacy: A properly designed self-funded plan can provide long-term cost control, often resulting in a "three-year cost rollback" to previous baseline levels and maintaining average annual increases below 10%, significantly beating fully insured market trends. • Data and Claims Processing Evolution: Healthcare processing has moved from manual, paper-based systems (taking 90 days to process claims in the 1980s) to electronic, rapid processing, underscoring the increasing reliance on data analytics in modern benefits management. • Captives Offer Tax Advantages: For clients in captives, the tax savings alone can be a "huge" benefit, adding another layer of financial optimization beyond standard self-funding savings.

Tools/Resources Mentioned:

• Slingshot (Zoe): Referenced as a company providing auditing and cost-saving solutions, indicating a shift toward advanced analytics in benefits management.
• Pareto Health: Mentioned as a manager of a large employee benefits group captive.

Key Concepts:

• Self-Funding/Self-Insurance: An employer assumes the financial risk for providing healthcare benefits to its employees, rather than paying a fixed premium to an insurance carrier (fully insured).
• ERISA (Employee Retirement Income Security Act of 1974): Federal law that governs most private employee benefit plans, including self-funded health plans, often preempting state insurance laws.
• Aggregate Stop-Loss: Insurance that protects the employer from catastrophic losses if the total amount of claims for the entire group exceeds a predetermined level.
• Advanced Specific: Insurance that protects the employer against catastrophic claims from any single individual employee, with the carrier paying large claims immediately.
• Loss Ratio Modifier: A bonus or penalty applied by stop-loss carriers based on the broker's book of business loss ratio; a low loss ratio indicates effective underwriting and risk management.

Examples/Case Studies:

• Robert Turell's Innovation: Larry Turell’s father pioneered one of the first self-funded plans for small to medium-sized businesses (10-25 employees) by designing a model for Chubb Life America.
• HCC Bonus: Turell received the highest bonus from HCC for two years running due to having the lowest loss ratio among their brokers, validating his rigorous underwriting process.
• Cost Rollback: Turell advises clients that moving to self-funding typically results in a "three-year rollback" in total costs, bringing expenses back to where they were several years prior to the transition.