Self-funded healthcare plans, also referred to as self-insured or alternative-funded healthcare plans occur when an employer assumes a portion of the financial responsibility of health care benefits to his or her employees, up to a set threshold. If you are a business owner, you may be considering the pros and cons of self funding for your company. Learn more about the benefits of self-funding and why you should talk with a benefits consultant before making your decision.
Why Self Funding?
Self funding of health plans continues to rise and grow in popularity. This is largely in response to rising health care costs, and the fact that consolidation in the fully insured market has left Employers with fewer options. In an era where new solutions are flooding the market to help reduce and control future healthcare spend, a self-funded plan is simply one of the best, and sometimes the only solution to help take advantage of these new tools Employers have available to them.
What is Self Funding?
When most employees hear the term “group medical plan,” they think of traditional fully-insured healthcare plans in which an employer pays a set premium for a specific plan. With a fully-insured plan, the insurance carrier assumes all of the risk in exchange for the price of a premium. This may sound like a good deal, but what if your plan runs better than expected? In these cases, they also retain these monies as margin. A self funding plan is different. Self funding is the largest type of health employee benefit and one which involves the employer assuming the initial financial responsibility associated with health care claims. Through self funding, a business can enjoy lower fixed expenses and more cash flow as they only pay for health care that the employee actually uses.
While self funding does have its benefits, there is also a certain amount of risk as the employer is responsible for paying employee medical claims up to a determined maximum. If your company has reserves left at the end of the year after paying all claims, you can retain this money, plus there are many other efficiencies gained along the way as well.
How Does Self Funding Work?
If you are interested in self funding your health plan, you will need to work with a benefits consultant to set up fundamental components of the plan, including the network of providers (if selected), pharmacy benefit manager, etc. A benefits consultant will help to establish relationships with all vendors, including TPA’s, networks, PBM’s, and more, while providing guidance on how to properly structure your healthcare plan, while a TPA will execute and manage the plan you have chosen.
To your employees, self funded health insurance looks the same as traditional insurance. If you opt for self funding, your employees will receive an insurance card that they will present at the doctor’s office, while paying copayments, or when requesting reimbursements. The main difference is that these costs will be paid out of your designated bank account which is managed by your TPA (who also acts as an accounts receivable, and accounts payable vendor for your health plan), rather than going to your insurance carrier. If you are concerned about the financial risk to the employer in the event of higher than expected claims, stop-loss insurance will provide two layers of added protection.
What are the Benefits of Self Funding?
In the United States, two thirds of employees under employer-sponsored healthcare plans are covered by a self-funded health plan. This type of health plan design can have benefits for both employees and employers, including the following:
- More Control Over Finances: With self funding, employers have more control over their finances as they are taking responsibility in funding rather than paying the insurance carrier premium payments. This allows employers to invest their money rather than giving it to an insurer every month.
- Lower Financial Strain: The costs associated with funding healthcare costs can be draining on businesses. With self funding healthcare plans, an employer can avoid a variety of costs such as the costs of claim reserves, premium taxes, profit margin, insurance company administrative costs, risk changes, and other costs that are often included in premiums. Fully-insured plan reserves and retention fees can range from 10 to 30 percent on average. Improved profit margin, and overall savings, help to go straight toward your EBITDA.
- More Design Flexibility: With self funding, employers have more control over the design of their healthcare plan. They are able to meet the unique needs of their employees while also aligning with company objectives. There are also other benefits of self funded plans, such as their exemption from state insurance laws.
- Convenient Cost Reporting: With self funding and a quality TPA, employers can gain access to convenient cost reporting in the form of regular, detailed plan data. Whether on a monthly or bi-monthly basis, employers can receive detailed reporting of costs by location, department, or medical service.
- Better Customer Service: Using a self funding medical plan often comes with a higher level of customer service than with traditional employer-based coverage. Quality TPAs are able to provide fast and efficient claims services.
- Maximized Interest Income: Employers who choose self funding instead of traditional health insurance maintain control over their health plan reserves. This allows for the maximization of interest income that would otherwise by collected by the insurance carrier through premiums.
- Fewer Laws and Regulations: Traditional group health insurance plans are subject to a variety of state and federal health insurance laws, regulations, and benefit mandates. Self funded plans are only regulated under the federal ERISA law which provides more freedom and control to employers.
Contact a Benefits Consultant Today
Self funded health care, also known as administrative services only (ASO) is a popular arrangement that is used by businesses in all industries. If you are deciding whether or not to use self funding, ask yourself the following questions: Do I want more control and transparency over health care costs? Do I want to manage my cash flow better? Am I tired of double-digit increases year after year? Do I want me employees to have lower premiums and/or lower copays and deductibles? If you answered yes to any of these questions, a self funded group health insurance plan may be right for you. To learn more about self funding or to compare your options, contact a benefits consultant today.