Under a self-funded insurance plan, the employer assumes the financial risks associated with providing employees with health care benefits. Employers who are self-funded essentially pay for each claim out-of-pocket as they are incurred, instead of paying an insurance carrier a fixed premium each month. Incurred claims are typically paid out of a special trust fund set up to hold both employee and corporate contributions. This type of health insurance arrangement is becoming more and more popular. According to a report published by the Employee Benefit Research Institute (EBRI), there are approximately 50 million employees and their dependents that receive health care benefits through self-insured group plans sponsored by employers.
Employers often face a number of challenges when it comes to employee health insurance plans. While you want your workers to have the proper health care benefits they need, you may struggle to pay a large portion of health care expenses upfront. It can be even more frustrating when employees do not take full advantage of their health insurance. To gain greater control over their finances, many employers are now turning to self-funded insurance plans. While self-funded insurance plans are more common among larger companies, small-to-medium-sized businesses can sometimes benefit from switching to a self-funded plan.
Why Consider Self-Funded Insurance Models
Self-funded insurance models differ from fully-insured health plans which accept a fixed premium to assume financial risk for medical expenses. Under a Fully Insured Plan, 100% of the costs paid to an insurer are fixed cost. Employers also lack flexibility, control, and insight over their health plan. Self-insured plans on the other-hand, split costs into two buckets: fixed cost, and variable costs.
Variable costs generally compose 80% of total health plan costs, leaving 20% of costs being made up of costs like Administration and Reinsurance. Reinsurance protection, otherwise known as Stop-Loss coverage, helps to protect an Employer against catastrophic claims. Thus, just like with a Fully Insured plan, an Employer knows their maximum risk scenario to budget for.
Self-funded insurance is unique as it does not pass the responsibility of claims payments onto a third party. Instead, your company will be responsible for paying claims up to your stop-loss limits. However, the rest of the process is fairly similar to traditional insurance policies. If any of the claims paid are less than the contributions from the Employer and Employees, everyone is then able to enjoy the surplus or lower health insurance expenses instead of losing the funds to the insurance company.
In this arrangement, Employers will contract with a TPA, or Third Party Administrator. The TPA is responsible for collecting funds from the Employer, and then dispersing them for the payment of all administrative costs, and claims costs. TPA’s also partner with an Employer and their Advisor to help create greater control over health plan expenses. As you have control over this process and your expenses, there is much more flexibility, transparency, and control as opposed to a traditional insurance plan.
There are a number of benefits that come with self-funded insurance models. Here is a closer look at these benefits and how they compare to traditional health insurance models.
Overall Cost Savings
Self-funded insurance plans can result in cost savings for employers compared to traditional health insurance plans. This is because TPA services work to better manage an employer’s insurance plan based on that employer’s unique specifications instead of conforming to an insurance carrier’s policy.. Employers who have the necessary resources to sustain a self-funded plan can see a positive improvement in their finances and overall bottom line.
There is a good reason why so many health insurance options exist. It is because there is no one-size-fits-all solution to employee health insurance. To meet the unique needs of your company, it is important to gain more control over your finances, which includes your health insurance benefits. With self-funded insurance plans, employers have the opportunity to customize their benefits and choose healthcare solutions that best fit their own needs and the needs of their employees.
Enhanced Cash Flow
Many employers desire an improved cash flow but do not have the means to achieve it. With self-funded insurance, enhanced cash flow is possible. Unlike traditional health insurance plans which require business owners to pre-pay for medical claims through their monthly premiums, self-funded insurance policies provide employers with much more flexibility. While traditional health insurance requires employers to pay for potential claims, self-funded insurance only requires employers to pay for claims for services that have already been rendered. This can help employers remain more in control over their cash flow and increase their ability to build up their savings account.
Less Stringent Regulations
There are numerous rules and regulations that come along with traditional health insurance, including state-based regulations and requirements. This can limit an employer’s ability to provide benefits to employers due to certain limitations. Self-funded insurance plans tend to be less stringent, as they are regulated primarily at the federal level. This affects nearly all areas of insurance, including taxes. Employers who use self-funded insurance instead of traditional health insurance are typically not responsible for paying full state premium taxes. These taxes generally range from 2 to 3 percent of the monthly premium cost. In addition, with self-funded insurance premiums are only collected when there is excess lost coverage.
Speak to a Professional Benefits Consultant
While self-funded insurance plans are not suitable for all employers, it can deliver certain businesses a host of benefits. Interested in learning more about the benefits of self-funded insurance plans or need help comparing insurance models? Then you need the guidance of a professional benefits consultant. Reach out to the experienced benefits consultants at BBG Broker today.