Businesses have struggled for years with rising health care costs, and new research shows these numbers will continue to increase. For this reason, a growing number of U.S. employers are making the switch to self-funding. Self-funding is not the right move for every organization, so employers considering a switch from fully funded to self-insured health plans should analyze the advantages and disadvantages before making a decision. Today we will go over what self-insured plans entail to help you decide if self-insurance is the right choice for your business’s health care benefits.
A Guide to Self-Insurance
What Is Self-Insurance?
According to the Self-Insurance Institute of America, Inc., “a self-insured group health plan (or a self-funded plan as it is also called) is one in which the employer assumes the financial risk for providing health care benefits to its employees. In practical terms, self-insured employers pay for each out-of-pocket as they are incurred instead of paying a fixed premium to an insurance carrier, which is known as a fully insured plan. Typically, a self-funded employer will set up a special trust fund to earmark money (employer and employee contributions) to pay incurred claims.” Keep in mind that employers can be partially or fully self-funded.
Self-funded group health plans are governed by a variety of federal laws including, but not limited to: ERISA, HIPAA, COBRA, the U.S. tax code, and federal anti-discrimination laws such as the ADA.
Advantages of Self-Insurance
The primary reasons employers cite for self-insuring are:
- Reduced insurance overhead costs: Insurance carriers assess an annual risk charge for insured policies (approximately 2%), but self-insurance removers this charge altogether.
- Reduced state premium taxes: Self-insured programs, unlike insured policies, are not subject to state premium taxes. The premium tax savings is about 2-3% of the premium dollar value.
- Avoidance of state-mandated benefits: Although both insured and self-insured plans are governed by federal law (predominantly ERISA), self-insured plans are exempt from state insurance laws. State benefit mandates can add to the cost of insured employer benefit programs. For multi-state employers, self-funding can help create national consistency within your organization by eliminating the need for state-by-state compliance.
- Employer control: Employers who want to revise covered benefits and the levels of coverage are free from state regulations that mandate coverage and the carrier negotiation typically required with changes in insurance coverage. By citing self-insurance, employers are able to design their own customized health benefit packages.
- Improved cash flow: Claims are paid as they become due. There is also a cash flow advantage in the year of adoption when “run-out” claims are being covered by the prior insurance policy. Employers pay for claims rather than premiums and earn interest income on any unclaimed reserves.
Disadvantages of Self-Insurance
The most apparent and primary disadvantage of self-funding is the assumption of greater risk. Your company must have the financial resources in case of a year that brings large, unexpected medical claims. This consequently puts greater demands on budgeting and cash flow. Budgeting is more difficult as health care expenses vary from year to year, whereas with a fully insured plan, employers know how much they will pay in premiums in a given year.
Self-insured plans also require strong administrative skills. Self-insured employers can either administer claims in-house or subcontract the administrative obligations to a TPA. TPAs can help employers set up their self-insured group health plans and coordinate stop-loss coverage (reinsurance), provider network contracts, and utilization review services. Additionally, duties associated with self-insurance may include monitoring the plan, determining premium rate equivalents for budgeting purposes, administering employee contributions, filing annual reports and day-to-day administration of the plan, establishing a trust to fund the group insurance plan, and setting up cash reserves to offset claim run-out liability.
As previously stated, one of the greatest assets offered by self-funding is the complete freedom to structure benefits according to the needs of your company. Employers can choose what benefits they want to offer while choosing to insure individual benefits through traditional means or forgo offering them altogether. The following benefits may be self-insured:
- Health care (indemnity, PPO, POS, and HMO)
- Short-term disability
- Prescription drugs
- Vision care
Employers can also make the final call on important variables, such as:
- Policy limits
- Retiree benefits
Employers are also free to administer benefits themselves if they have the necessary resources or to retain a third-party administrator at a fraction of the cost of a traditional benefits provider.
Also, one of the largest benefits to employers worried about the potential for large claims is the ability to acquire stop gap insurance, allowing managers to determine their total amount of yearly costs with 100 percent certainty. These factors, along with the ability to customize benefits, make self-insurance plans a popular choice among employers across the U.S.
Making the Decision
When deciding if self-funding is the right path for your company, consider the following practices to make sure that your self-insured strategy is effective:
- Evaluate stop-loss coverage: Most self-insured employers purchase stop-loss insurance on their self-insured health care benefit plans to scale back the danger of huge individual claims. The employer self-insures claims up to the stop-loss attachment point, which is that the dollar amount above which claims are going to be reimbursed by the stop-loss carrier. This is referred to as being partially self-funded, and is the most common form of self-insurance.
- Understand the quantity and nature of your employee health claims: Knowing facts like the typical age of your workforce, whether the bulk of claims are due to chronic illnesses or one-time incidents, and the total dollar amount of claims will assist you in making claims in the future. Self-funding should be viewed as a long-term strategy during which good and bad years balance out in the employer’s favor.
- Analyze income: Self-insured plans work best for companies that have a robust income or reserves. Understand what your cash needs are so you’ve got money available to form timely claim payments.
- Decide whether it’s best to administer the plan internally or through a TPA: If you opt that it’s best for your organization to use a TPA, confirm you factor TPA fees into your decision to self-insure. Obtain several different TPA quotes. Your TPA should offer a sturdy strategy for monitoring the plan.
- Make coverage goals: Focus on goals such as eligibility, benefit coverage, exclusions, cost-sharing, policy limits, and retiree benefits. Weigh the self-insured plan advantages of flexibility and lower monetary value versus the increased risk and administrative responsibilities to decide what’s best for your company.
Ultimately, the most important step to assure you’re making the best decision is to have an experienced professional guide you through the process.
Your Professional Partner
At Alltrust Insurance, our representatives have experience with self-funded programs and can answer your questions and assist you with your decision to self-insure your company health plan. We welcome the opportunity to help your organization examine its plan designs and make recommendations for improvement. Contact us today via our website to further discuss what plan best suits your organization.