More and more employers are making the switch to self funded insurance and for good reason. Self funding occurs when business owners take on the financial risk of providing their employees with certain healthcare benefits. Self funded health plans differ from fully-insured health plans which are a more traditional way to structure employer-sponsored health insurance. Unlike self funded insurance, fully-insured health plans require a company to pay a premium to an insurance carrierg. The insurance carrier then collects the premiums and pays any health care claims based on the coverage amount outlined in the policy. Self funded insurance is different.
What Is Self Funded Insurance Exactly?
Self funded insurance is a type of employer-sponsored healthcare plan in which the employer takes on a known amount of claims risk directly, as opposed to paying an insurer to take all the risk. Employees will continue to incur payroll deductions for coverage and those funds are ultimately used by the employer to cover a portion of incurred claims, administrative costs and reinsurance. While self funded healthcare may be more predominant amongst larger businesses, a significant shift has brought these plans down to employers with as few as ten employees.
There are a number of key differences between a self funded healthcare plan and a traditional fully-insured policy. First is the amount of control given to the company over healthcare benefits. With self funding, the company has full control over the healthcare policy and employers are able to choose a plan that meets their unique needs by customizing coverage options. These employer funded plans allow companies to directly fund medical care expenses using stop-loss insurance which helps cover larger claims. Stop-loss insurance is designed to limit a company’s loss to an amount that is specified by the business owner.
How Does Self Funded Insurance Work?
Similar to a traditional insurance premium, self funded insurance plans have fixed expenses, such as stop-loss premiums and administration fees. These set fees are charged per employee and billed on a monthly basis. The employer that is sponsoring the plan must cover the cost of claims made by employees enrolled in the plan. Employers will usually create a trust fund to pay claims and will often use a third-party administrator (TPA) to process or adjudicate the claims. Some employers may choose to administer claims in-house instead of subcontracting out the work to a TPA.
Why Do Businesses Choose to Self Fund?
There are a number of reasons why some businesses choose to self fund instead of working directly with an insurance company. One of the first reasons why self funding is becoming a popular option for employers is the ability to save money. When businesses hire TPAs to manage their self funded insurance plans, these third-party administrators often have the ability to find additional cost savings through a more focused approach to medical bill review and greater leniency in promoting low-cost, high-quality medical providers. Simple measures like these can result in an immediate reduction in claims expenses, without sacrificing the quality of the care of benefits employees receive. TPAs are also able to customize plans that best benefit the employer without strict plan restrictions often seen with fully-insured insurance plans.
Choosing self funded insurance or fully-insured plans also results in lower administrative costs. When businesses choose to self fund, they are able to avoid the expenses associated with claim reserves, risk charges, insurance carrier profit margins, and premium taxes. These businesses can also avoid the steep costs of the Affordable Care Act’s Health Insurance Tax. Along with fewer administrative expenses, businesses who choose to self fund can also benefit from better cash flow. As self funding requires claims to only be paid as incurred, not a predetermined, fixed amount each month. As a result, business owners are able to keep the funds in their bank account longer where it can continue earning interest.
With self funded insurance, employers are able to structure their benefits plans based on the unique needs of the company. In addition to choosing what types of benefits they want to offer their employees, employers also have the option to insure individual benefits through traditional avenues or avoid them altogether. There are a number of different benefits that can be self funded, such as dental, prescription drugs, vision care, short-term disability, and health care including PPO, HMO, and POS. Business owners also have maximum control over variables like policy limits, cost-sharing, exclusions, retiree benefits, and eligibility requirements.
Who Is the Ideal Candidate for Self Funding?
While self funding certainly has its benefits, it may not be the right choice for all businesses. If you are considering switching from fully-insured insurance to a self funded policy, you will want to consider what the ultimate objectives of the company are and the outlook in which the company wishes to achieve those goals. Self funding should be viewed as a long-term strategy for employers to take full control of this component of their business. Self funded plans can be customized to fit a wide range of budgets and are often preferred by employers who want to have more predictable benefit expenses. The ideal candidate for self funding is also an employer who is willing to accept a known financial risk and has the necessary cash flow to handle months in which claims may be higher than expected. While stop-loss insurance can be used to cover costs that exceed the set limit, the employer will still be responsible for a large percent of the claim.
Self funding may be right for your company if:
- You want to know where your healthcare dollars are going.
- You want the ability to customize your healthcare benefits.
- You understand the level of risk you are taking.
- You prefer to keep extra funds not spent on healthcare claims.
- You want lower administrative costs.
- You want to eliminate state premium taxes.
Learn More About Self Funded Insurance
Self funded insurance policies are an excellent alternative for any company that would like to maximize their potential return on their health insurance dollars. Of course, there are some disadvantages that come with self funding, such as a higher financial risk, liability limits set by the stop loss vendor, irregular monthly cash flow issues, and certain compliance issues that your company could run into.
Although self funding has significantly grown in popularity in recent years and has been proven to save employers money, some companies are still hesitant to make the switch from traditional fully-insured plans. For more information about self funded insurance or to see how if this option may be right for your company, contact the employee benefits consultants at Business Benefits Group.