February 2015, Vol 1
The Actuarial View
An Employee Benefits Newsletter with a Bottomline Focus

Message From An Actuary
Tim Luedtke, FSA, CFA

This edition of The Actuarial View reviews a topic increasingly of interest to employers, your clients, and Congress.

If you are an accountant or an auditor now would be a good time to review any changes your client has or plans to make to financing their benefit plans. The Affordable Care Act includes provisions which encourage employers to pursue self-funding their health benefit plan.a While offering real cost advantages, self-insuring also increases the employer's risks bringing new liabilities to the balance sheet.

Please contact us if you would like help addressing your client's changing risk and actuarial needs.


Tim Luedtke, FSA, MAAA, CFA
Principal & Consulting Actuary

Diane Luedtke, FSA, CLU
Principal & Consulting Actuary

Self-Insurance: Putting "Affordable" Back into the Affordable Care Act
Tim Luedtke, FSA, CFA

Are your clients self-insuring or considering the self-funding of their health benefit program? Whether you act as your client's broker or auditor, how your client decides to finance their employee benefit plan may warrant your seeking the services of an actuary. Self-insurance subjects your client's finances to the risk that claims may exceed the cash budgeted for the program.

And if your clients have not yet taken the plunge, provisions projected to take effect in 2016 could provide the incentive to give self-insurance a fresh look. Certainly, Congress is paying attention with self-insurance issues increasingly being discussed at the congressional committee level.1 In 2016, the Affordable Care Act (ACA) requires all states to implement an expanded definition for small employers to include all employers with up to one hundred (100) employees.2 Today, across all fifty states small employers are limited to groups of fifty (50) or fewer employees.3 With the expanded definition to 100 employees, fully insured employers having 51 to 100 employees are exposed to the following:

  • A potential rate increase of 6% due to a lower minimum loss ratio requirement. Large group business must meet a minimum loss ratio of 85%, while small group and individual business must meet only an 80% loss ratio.
  • Rate uncertainty associated with how insurers combine risk pools to incorporate the larger employers. Such rate uncertainty could be especially significant leading to increased premiums for employers that benefited from rating variables that had previously applied to their group e.g., employer-specific historical claims, industry, gender mix, etc.

With the potential for increasing costs any employer with a reasonably healthy employee group would do well to evaluate their self-insurance options. Especially given the decision leadership provided by employers in Massachusetts. Massachusetts led the nation by passing its own health reform law in 2006. And the Massachusett's experience suggests self-insurance is worth exploring. From 2006 to 2011, "the percentage of workers statewide [Massachusetts] in self-insured plans increased . . . in firms with 50+ employees, from 54.4% to 67.2%".4

Key advantages to self-insurance include:

  • Not required to meet any benefit mandates legislated by state governments;
  • Greater working capital and cash flow control when claims experience is good;
  • Lower administrative costs - Key drivers of such lower costs include: 1. Premium taxes do not apply to self-funded plans, 2. No risk charge as employer retains all risk, 3. Commissions are lower, though may be offset somewhat by a broker fee and 4. General administrative and underwriting fees are lower; and
  • The employer as the plan sponsor has much greater control and flexibility in designing the plan options.

Employer flexibility is especially valuable in a post-ACA world. While receiving an unfavorable response from the Center for Consumer Information & Insurance Oversight and the Internal Revenue Service, an example of such flexibility are "skinny plans" or plans offering preventive services, yet not covering some of the most expensive coverages e.g., hospitalization and physician services.5 Such plans would not be an option for employers offering an insured plan.

If your clients have not yet considered self-funding you may want to discuss self-funding as an option. Or where your client has already made the move to self-funding, remember that liabilities should be established at the end of each accounting year to assure the balance sheet appropriately demonstrates your client's financial position. And further, that stop loss contracts should be reviewed for springing liabilities resulting from future actions the stop loss provider could take at contract renewal.

Contact us if you'd like to learn more about how we can help you analyze your options.

aSmall Firm Self-Insurance Under the Affordable Care Act, Matthew Buettgens and Linda J. Blumberg, The Urban institute, November 2012.
1House Hearing Scrutinizes Self-Insured Plans, Stephen Miller, February 28, 2014.
2Section 1304(b)(2)&(3)
3Small Group Health Insurance Market Guaranteed Issue, The Henry J. Kaiser Family Foundation, 2013.
4Self-Insured Health Plans: State Variation and Recent Trends by Firm Size, Paul Fronstin, Ph.D., November 2012, Vol. 33, No. 11
5"Skinny Plans Adhere to the Letter (But Not the Spirit) of health Reform", Employee Benefit Series July 2013. & "The PPACA skinny plan war: 4 ways it could burn you", Allison Bell, November 4, 2014.

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