Setting Aside Reserves

By Bill Rusteberg

Plan sponsors new to self-funding invariably ask “How much do I need to set aside for reserves upfront?” The answer is you don’t. Instead you fund 18% of your expected liability, or 1/12 x 2.25 during the first three months of the new plan.

Taking Advantage Of Claim Lag

Three months going in pays for three months going out, simple as that. Each of the first three months are funded by 1/12 of annual funding required. Those funds accrue to pay for claims incurred but not reported during that same period of time. This is how initial reserves are staged. On subsequent renewal periods reserves must be adjusted to reflect trend, common under a traditional PPO plan. That adjustment averages 2-3%. Plans we manage have eliminated medical trend so reserve adjustments are nil.

General Asset Plans

The reality, from what I have seen over many years in the self-funding arena, is most plan sponsors fund their plan through general assets in lieu of a trust. Many are on a pay-as-you-go basis. Others are sensitive to the need for reserves in the recognition poor claim years will surely occur at some point. These plan sponsors carefully book those monies as a liability to their ledger.

Plan Management & Fiscal Discipline

Almost every group we manage are the later. Most are over-reserved. As expected, each have experienced a poor, unexpectedly high claim year over time, requiring infusion of reserves to remain solvent for the remainder of the plan year.

However there are always exceptions. One pay-as-you-go come Hell-or-High-Water plan sponsor experienced a terrible claim year midway through the plan year. The owner was facing a $2.5 million deficit and complained his plan “was a disaster.” When reminded that had he funded as we had suggested over the prior three years he would have had enough (and then some) to easily fund these unexpected claims. His plan wasn’t a disaster, he was.

The key ingredient of a successful self-funded health plan is tied to fiscal discipline and competent plan management. Reserves play an important role for long term success.

The shared vision of and clients who retain our services is to establish and maintain a comprehensive employee health and welfare plan, identify cost areas that may be improved without cost shifting to any significant degree, and ensure a superior and sustained partnership with a claim administrator responsive to members needs on a level consistent with prudent business practices.

Plan costs, in all areas including fixed expenses and claims are open for review on a continuing basis. Cost effective plan administration and equitable benefit payment to providers are paramount to fulfilling our mutual fiduciary duties.

As we proactively monitor and manage an entire benefit program we are open to any suggestions members may make or the dynamic health benefit market may warrant in order to accomplish these goals. Duty of loyalty to our clients, transparency and accountability are essential to the foundation of our services. To that end, we expect our clients to realize a substantial savings based upon the services that we will deliver.

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