Bloomberg Law

The basic premise of self-insurance is simple enough: rather than pay fixed premiums to an insurer in exchange for a prenegotiated level of health or other insurance benefits for its employees, an employer agrees to fund the reimbursable medical claims of its employees directly. The claims themselves are administered by a third party administrator for a fee according to a set of rights, responsibilities, and procedures set forth between employer and administrator in the terms of an Administrative Services Agreement (ASA).

Authors: Michael P. Cooley

People meeting and reviewing business documents

Employers often view self-funded insurance plans as a means to reduce costs. According to the Employee Benefit Research Institute, as of 2018, 38.7% of employers reported self-insuring at least one of their health plans, including 79% of employers with 500 or more employees. For the insurer, acting solely as an administrator of the claims submitted under the plan provides a revenue stream without - at least in theory - the risk that claims paid exceed premiums collected.

But insurance is in some ways a bet on the future, and with the nation in the grip of both a novel coronavirus pandemic and the accompanying economic downturn, critical variables may be shifting rapidly for both insurers and employers alike as medical claims increase just as business revenues shrink to previously unimaginable levels. Companies that cannot consistently cover their ordinary monthly operating expenses find themselves in an ever-deepening hole as they are forced to defer (and frustrate) vendors, cannibalize assets to raise cash, or draw existing credit lines further to stay afloat. At the same time, plan administrators must guard against becoming overextended to the extent they advance payments for health claims for financially distressed employers.

Set Your Baseline. Even before getting to the question of whether any particular employer's business is in distress, the first thing to do is the simplest: read your contracts. Administrators and employers alike should take the opportunity now to refamiliarize themselves with precisely what rights and obligations are set forth in their ASAs and other agreements.

Administrators and employers often get into a rhythm of performance based on mutual convenience (or unconscious neglect) that may not be entirely consistent with what the contract requires or permits. Having reviewed the ASA's terms, consider the parties’ behavior relative to the contract. If the ASA defines “timely” payment to mean ten days after notification to the employer of amounts due the administrator, is the employer consistently “timely”? If not, is there a reason? If the ASA conditions the administrator's duty to pay claims upon the employer having made all payments due to the administrator, has the employer done so? If an employer is running a claims fund deficit, the administrator's attention will necessarily go to risk mitigation. Some of that mitigation can be achieved by completing the contract review described above and ensuring that employers are properly and timely fulfilling their respective payment and other contract obligations. Fund deficits - where the administrator has advanced more to pay claims than the employer has paid in - create risks for administrators and employers alike. For the administrator, it creates a financial exposure. For the employer, the fund deficit is a liability with the potential to impact continuity of employee health plan benefits when they may be needed most.

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