Self funding, otherwise known as self-insured insurance, is a plan in which the employer takes on the financial risk of providing certain healthcare benefits to his or her employees. With self funding insurance, companies pay for healthcare expenses out-of-pocket as they are received. This differs from traditional health insurance in which an employer pays a pre-determined premium to an insurance carrier, a policy known as a fully insured plan. Learn more about self funding insurance, how it differs from traditional insurance options, and why so many employers are now making the switch.
How Does Self Funding Insurance Work?
When an employer chooses to provide employees with healthcare benefits through self funding, he or she will typically set up a special trust fund designed to earmark money to later pay incurred claims. Employers rely on third party administrations (TPAs) to process claims on their behalf. TPAs may also provide additional services, such as collecting premiums, providing utilization review of claims, contracting for PPO services, and providing overall service for the chosen employee benefit plan. Healthcare claims can either be subcontracted to a TPA or can be completed in-house.
If you are considering becoming a self-funded employer, you may be worried about the occurrence of catastrophic claims. Fortunately, employers can protect against unpredicted claims and avoid financial distress. While larger employers typically have enough financial reserves on hand to cover nearly any healthcare costs, some smaller businesses may not have a large reserve. To cover catastrophic claims, these businesses rely on stop-loss insurance. With stop-loss insurance, employers are reimbursed for any claims that fall above a specific dollar amount. This can be highly beneficial for employers who want to switch to self funding insurance but do not yet have the funds to cover exorbitant healthcare costs.
How Does It Differ from Traditional Insurance?
Choosing the right type of health plan is a crucial part of the growth and long-term success of your business. However, many employers are confused about the differences between self-funded and traditional insurance. With self funding insurance, a company is responsible for paying for its own medical bills directly and a TPA performs tasks such as processing claims and issuing ID cards. When a company chooses to go with traditional or fully-insured insurance, the company pays a premium to an insurance carrier. The premium is usually fixed for the year and is based on the number of enrolled employees. In this case, the insurance company assumes the risk.
Self-funding is more common among larger businesses due to the amount of risk involved. Companies that have less than 250 employees are often afraid that switching to self-funding insurance would expose them to excessive risk and potential financial ruin. However, most are not aware that stop-loss insurance is available to cover these risks. Stop-loss insurance is in place to cover any sort of unexpected or catastrophic healthcare costs that involves one or more employees.
Why Switch to Self Funding Insurance?
1. Cost Savings from Benefit Design Changes
Self-funded employers who choose to use the services of TPAs have been found to save more money on their health plans per enrolled person then they would have with traditional insurance. This is because TPAs work to manage an employer’s plan based on the employer’s specifications instead of according to an insurance carrier’s policy. Self funding insurance can save employers money through individualized plan management without the need for gimmicky “discounts” or marketing schemes. In short, making the switch to a self-funded insurance policy can have a positive impact on an employer’s bottom line.
2. Increased Flexibility and Control of Plan
When it comes to health insurance, there is no such thing as a one-size-fits-all plan. As your company is unique, your health plan should be too. To meet the unique needs of your employees and best suit your business, opt for a self-funded plan that allows for more flexibility and control over the terms. With self funding insurance, employers have the opportunity to work directly with a TPA to custom design their benefits. You can choose healthcare solutions that fit your needs and adjust them over time as needed.
3. Enhanced Flow of Cash
Improved cash flow is one of the biggest reasons employers are choosing to switch to self funding insurance. Unlike traditional health insurance plans which require employers to pre-pay for potential claims through monthly premiums, a self-funded health insurance policy provides businesses with more flexibility. As employers are only required to pay claims as services are rendered, they have more control over their cash flow. Many employers who use self funding insurance find that they are more in control of their cash flow and have a higher possibility for extra savings.
4. Cost Savings from Reduced Premiums
Employers who use self funding insurance are not responsible for paying full state premium taxes, which can range between 2 and 3 percent of the monthly premium cost. Insurance companies are charged state taxes on collected premiums. With a self-funded policy, premiums are only collected with excess loss coverage which is typically a fraction of the standard insured premium. This means that premiums are significantly reduced for employers who have self funding insurance. Employers may also save in other areas. For example, insurance companies often charge extra fees such as risk and retention charges. These types of charges are not applicable on self-funded plans.
Contact an Experienced Benefits Consultant
Changes in the healthcare industry have changed the way that employers approach health insurance. A common trend that is being seen is the move towards self funding insurance. For both big and small businesses, making the switch from traditional insurance to a self-funded plan can have a number of advantages, including money-saving benefits and greater flexibility. However, if you are not familiar with self funding insurance it is important to ask questions and familiarize yourself with your options. For more information about self funding insurance or how to obtain a healthcare plan, contact a professional benefits consultant.