Most employers search for methods of lowering their company’s spending on their health benefit plans. Some modify plan designs, some change carriers, some shift more costs to employees. And some employers move from offering an insured health plan to a self-insured healthcare plan.
In a self-insured healthcare plan, the employer takes on direct financial responsibility for employees’ healthcare costs. Rather than being part of a larger risk pool, an employer that self-funds takes on the risk for its employee group alone.
All of a health plan may be self-funded, or an insurance contract might be purchased to cover certain types of claims. Most self-insured healthcare employers buy stop-loss insurance to cover catastrophic claims.
Being exempt from state insurance laws and mandates and not having to pay premiums on a regular basis to an insurance company can result in substantial cost savings. Yet, many employers, especially smaller employers, shy away from self-funding, perceiving it as too risky.
According to a Kaiser Family Foundation Health Benefits Survey, about 60 percent of all covered employees are in self-insured healthcare plans. Among employers with 200 or more workers, 82 percent of employees are in self-insured healthcare plans, compared to 13 percent of employees in firms with 3–199 workers.
Self-funding health benefits will be the right approach for some companies, and not for others. If your company is mulling over moving to a self-insured healthcare plan, here are some basic preliminary considerations:
Self-funding can give you more control over your health plan than you have with an insured plan. Your company can customize coverage, since you are not buying a prepackaged product.
Though self-funded plans are subject to ERISA, they are not bound by state insurance laws, so a self-funded plan is not required to include types of coverage required by state insurance law. Instead, you can create a plan that truly meets your employees’ healthcare needs.
With a self-funded plan your company pays health claims as they are incurred, rather than paying a premium to an insurance company on a regular basis regardless of whether employees are filing any claims. This can be attractive, especially during periods when claims are low. The flip side, of course, is that you need to be able to handle large claims or a steady stream of moderate claims when they do arise.
A company with a self-funded plan does not need to worry about the financial stability of an insurance company. There are, however, special considerations if your company is thinking about self-insurance.
Your cash flow needs to be healthy enough to handle ordinary claims as they arise and you need to have a plan for paying a series of large claims or even one truly catastrophic claim. As noted above, most employers that self-fund carry stop-loss insurance, to limit their liability for either or both large individual claims or claims in the aggregate in excess of a specified amount.
When you pay a premium to an insurance company, you’re paying for more than just claims; the premium will take into account the insurer’s administrative and other costs (overhead, advertising, technology, etc.), some allowance against risk, a profit margin, et cetera.
Companies that self-fund won’t have to pay all these hidden costs, but they will incur other expenses, e.g., the cost of claims administration (whether handled internally or by a third-party administrator) and the cost of stop-loss insurance.
Most insured health plans are packaged with a well-developed provider network, and if you’ve had the same plan for a while, your employees are likely settled with their choice of doctor, hospital, etc. If you move to a self-insured healthcare plan, you’ll need to make sure you arrange to have a suitable network in place.
With the advent of the PPACA, providers are now targeting smaller companies for self-funded plans, with some designed for as few as 20 employees. If structured correctly, these plans can provide smaller employers the same benefits as larger ones.
Workforce demographics can make self-funding a more or less attractive option. Of course, young and healthy employees can suffer large claims, and older workers won’t necessarily break the bank.
But remember that self-funding means that your company alone (other than the stop-loss carrier) will bear the risk for your employee group, so it’s worth closely analyzing this risk with a professional who can give you well-reasoned estimates of your potential liability.