Whether your business already has a self-funded group health plan or you are considering becoming self-funded, it’s important to consider all the options so you can make the right choice for your company and your employees. Here you’ll find insights and tips that you can use immediately.
When it comes to self-funding, there are three key decision points:
1. Funding arrangement—How will an employer pay for insurance benefits for its employees? To answer, an employer needs to first determine its benefits strategy and financial goals. Understanding its risk tolerance, size, and cash-flow needs will help the employer decide if it should be fully insured, self-funded with stop-loss insurance, or self-funded without stop-loss insurance.
2. Claims administrator—Selecting a claims administrator determines the provider network or networks available to the employer and its plan members. In addition, the claims administrator and its approach can have a significant impact on the success of the self-funded strategy and the benefits experience of the insurance plan members.
3. Stop-loss insurance—For many employers, the risk associated with a self-funded plan is managed through stop-loss insurance. To choose the right stop-loss carrier and protection level, the employer needs to consider its own financial profile (including risk tolerance), its claims experience, and the potential carrier’s attributes and product options.
Once the key decisions have been made, it is time to create an action plan. If the employer chooses to self-fund, it now has the flexibility to design a plan to suit its business and can strategize about cash-flow management and stop-loss coverage. In addition, the broker, administrator, and stop-loss carrier can team up to help the employer contain costs and improve patient outcomes.
An employer has more flexibility and financial control with self-funding than it does by fully insuring. An employer that self-funds can design the health or ancillary plan and cost-savings strategy according to its preferences. If an employer fully insures, it is limited to the plan design options offered by an insurer.
In addition, self-funding provides increased claims-data access, which allows the employer (or its broker or administrator) to make decisions to improve the health, wellness, and productivity of its employees and help the bottom line through its ability to:
- Perform more in-depth utilization analysis and identify claim trends
- Refine its benefits plan design and options
- Tailor health management and improvement programs, such as case management, wellness programs, and employee incentives
Self-funded employers, more so than fully insured employers, have opportunities to save. Savings can come from lower taxes due to the different taxation laws. A self-funded employer also has the ability to design an insurance plan so it can produce savings. In addition, a self-funded employer can use cost-containment strategies and programs, which may result in lower-than-expected claims amounts.1
How much can an employer save by self-funding?2 The Self-Insurance Educational Foundation shared the different ways that self-funding can lead to employer savings:
- Lower administration and insurer profit costs (typically 15–20% of plan premium for a fully insured plan)
- Lower premium taxes (only excess-loss coverage premium is taxable)
- Retained dollars from unspent claims funding
Should businesses of a particular size self-fund?
The rising cost of health care combined with Affordable Care Act requirements has raised interest in self-funding. But self-funding is not for every business. In the past, very large companies typically self-funded and retained all the risk; many large and midsize employers self-funded and retained some of the risk; and smaller employers tended to fully insure their insurance plans.
Regardless of employer size, every business needs to consider certain things when deciding to self-fund. A 2018 Employee Benefit News article3 shared a list of things to consider:
- Additional compliance responsibility
- Risk tolerance
- Ability to deal with volatility
- Level of knowledge about how to administer the plan and analyze data
- Stop-loss and the appropriate levels
So, the answer to “how small is too small to self-fund?” really depends on the employer in question. By following the above recommendations and working with a knowledgeable broker, the employer—regardless of size—can determine if self-funding makes sense for its particular business.
Lower taxes, anyone? Self-funded medical plans tend to have lower taxes than fully insured ones. Why? Fewer taxes apply to self-funded plans. In addition, state premium taxes for self-funded plans are assessed against stop-loss insurance premiums instead of health insurance premiums. Stop-loss premiums are typically much less than health insurance premiums, so the self-funded employer gets a comparatively lower tax bill.
Costs associated with self-funding
When an employer self-funds, it must determine how much risk it’s willing to take and if its cash flow can accommodate the new funding arrangement, including paying for claims, administration fees, and stop-loss coverage. In addition, it’s important to consider state and federal regulatory requirements.
Fully insured plans, self-funded plans, and stop-loss insurance are all governed by a variety of laws. A host of federal laws apply to both fully insured and self-funded plans. Additionally, every state has the ability to levy taxes, impose requirements, and regulate how fully insured plans and stop-loss insurance are structured and sold. The easiest way for self-funded employers to stay on top of federal and state requirements is to seek advice from experienced professionals, such as brokers and attorneys, who specialize in servicing self-funded clients.
Weighing the self-funding decision
There are clear advantages and responsibilities to consider when deciding whether to self-fund. Self-funding isn’t appropriate for every business, but it can be the right decision for many. Typically, an employer will depend on its broker to guide it through the process of funding arrangement evaluation and subsequent decisions. A broker is a great resource to tap and can advise on self-funding and stop-loss coverage trends in different industries. He or she can also recommend ways to manage cash flow and the risk associated with high-cost claims.
1 The Rough Notes Company, Inc, “Stop-Loss insurer Sun Life provides a wide range of backup services,” http://roughnotes.com/selffunded-health-plans-put-employer-control/, March 28, 2018
2 Self-Insurance Educational Foundation., “Employers: Specific advantages of self-insurance,” http://www.siefonline.org/employers.php
3 Employee Benefits News, “Small employers flock to self-funding,” https://www.benefitnews.com/news/small-employers-flocking-to–self-funding, May 2, 2018
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