When it comes to an employee’s healthcare, it is important to decide how best to fund medical expenses. An employer may choose the traditional, fully-insured model in which a set monthly premium is paid to an insurer. An alternative arrangement is for the employer to cover the employee’s claims expenses, up to a set maximum amount per employee. This is referred to as self funding.
What is Self Funding?
In a typical self funding model, an employer will still select an insurer to partner with, who will cover any claims expenses over the pre-determined, set maximum amount per employee. This is referred to as your individual stop loss (ISL) or specific deductible (spec). An additional layer of protection is provided to the employer through coverage known as Aggregate Stop Loss (ASL). This coverage sets a maximum group-wide expense limit for the year and assist the employer in the event claims broach that number.
Because the employer assumes the responsibility for any employee claim costs before the individual stop loss, this results in the fixed premium expense of ISL and ASL being a fraction or normal insurance costs. Reducing the cost of insurance, while eliminating certain taxes and insurer profits is what makes self funding attractive to many employers. The added value to self funded insurance, is the transparency in claims data, allowing the employer to be more strategic and help curb what issues are truly driving their claims; data which is otherwise difficult to secure with a fully-insured plan.
Who Uses Self Funding?
Many different employers use self funding. Traditionally, self funded insurance was reserved for larger employer (typically over 500 employees) due to financial cash flow needs and stricter ISL and ASL insurance contracts. To accommodate a growing demand from small and medium employers for more funding options and transparency in claims data, new products and more lenient stop loss contracts have been created. This has helped bring self funding options downstream to employers as few as 10 employees. Any employer considering this option should be well-versed on the mechanics and should consult with BBG before doing so.
Benefits to Self Funding
Self funding comes with its own benefits for using this type of healthcare plan. One benefit is that the employer is largely in control of these funds and allows them to budget how they see fit. There is also an added layer of flexibility with respect to contracted providers, as the employer may choose to lease a carrier network or pursue other alternative network solutions.
The network selection is separate from the ISL & ASL insurance provider, meaning the employer is not bound by network and insurance protection being provided by the same vendor. Self funded insurance is also capable of raising interest income and cash flow, as well as lowering taxes. On top of that, there are less confusing and contradicting regulations to follow due to being governed by the Employee Retirement Income Security Act of 1974.
When it comes to self funding, employers are usually governed by the Employee Retirement Income Security Act of 1974, or ERISA. ERISA was first enacted on September 2, 1974 as a guideline for minimal standards for pension and health plans in the private industry. Essentially, it created rules to healthcare plans and pension plans that each company must follow, such as the minimum needed to be able to give out healthcare plans should a company develop one.
ERISA governs self funding themselves rather than having the insurance company govern the rules and regulations of self funding, which can be seen as an ideal situation for those who do not want to go through the insurance company for their plans. ERISA also protects people who self-fund with their rules and regulations and while the outline may seem rigid, it allows plenty of customization for healthcare plans. Through ERISA, employers can have the benefits of self funded insurance without worrying about insurance company guidelines.
Reference Based Pricing
Reference based pricing is a funding option which falls under self funding. In this model, the employer sets a pricing cap on the maximum amount they would cover when it comes to certain medical services. This is done through third party administrators who facilitate the process to eliminate employer involvement.
Typically, the pricing cap is derived from Medicare and is set at 120% to 175% of what Medicare pays. Considering the average PPO plan pays upwards of 300% of Medicare, a reference-based pricing model will create a significant savings opportunity. By eliminating the traditional PPO network/contract, this also allows members to seek services without the restriction of a specific, defined list of providers. While not all providers accept Medicare and therefore a plan using Medicare as the cost basis, employers should be aware that provider access or refusal to accept the plan can arise, but typically only on a very small percentage basis.
How We Help
BBG can help determine whether self funded insurance works for your company or not. We work with you to determine the right sort of healthcare plan that is perfect for any employer, both large and small in size. We make it our goal to secure the future of your business through any means necessary, especially through employee benefits and business insurance. Our benefits brokers are well trained in the field of self funding and can help guide you through the entire process, allowing you to feel more confident with your decision.