As employee healthcare benefit costs continue to consume a greater share of the bottom line, many organizations are finding that a self-funded – or self-insured – health plan can be an effective alternative to the traditional fully insured model.
While fully insured plans, backed by a commercial insurance company, offer the security of a known monthly expenditure, many employers complain about the rigidity of plan design, lack of cost containment and weak customer service. Many of these issues can be addressed through a self-insured plan, in which the employer takes on the financial risk of its enrollees’ healthcare – rather than pay a monthly premium – and consequentially can gain greater control of its benefits program.
Is a Self-Funded Health Plan Right for Your Organization?
Here are five key questions you should ask:
How much work?
With a self-funded plan, the employer assumes greater responsibility to replace services that are typically provided by the insurance company in a fully insured model. You have to determine your organization’s capacity to manage the added workload, which includes determining benefits eligibility, monitoring utilization and keeping records for compliance. While your legal and fiduciary duties cannot be contracted away, much of the administrative burden can be shouldered by external vendors. Comprehensive benefits management technology platforms, such as Benefitfocus Marketplace, can act as an extension of your HR office, providing automated eligibility rules enforcement, easy access to claims reports, electronic delivery of ACA-mandated documentation to the IRS, and much more.
How much risk?
A self-insured employer is responsible for all claims under the health plan, so you have to assess your ability to assume the risk of paying out those claims. Consider the extent to which your workforce stability and cash flow allow you to predict and cover the costs incurred by plan participants. If you do go self-funded, you may choose the amount of risk to retain (the amount to be covered) through Stop Loss coverage, which is purchased from an insurance carrier as protection against catastrophic or unpredictable large losses. But while Stop Loss coverage can significantly limit your liability, there is still the possibility that your actual costs could exceed those of a fully insured plan in any given year. A long-term approach to self-funding can eventually even out years when costs fall outside the norm, but if your organization has had historically poor claims experience, it might not be worth switching to self-funding.
How much savings?
Self-insuring can be more cost-effective in the long run than fully insuring because it eliminates many of the expenses that come with a fully insured plan. You can achieve significant financial advantages through the following features of a self-insured plan:
- Savings from lower-than-expected claims belong to the employer; they don’t become the insurance carrier’s profit.
- Money that would otherwise be held by the insurance carrier – in the form of reserves or pre-paid premium – is freed up for the employer’s own use. A self-funded employer only pays for expenses after they’re incurred, and retains control of any interest earned on reserve funds established to pay claims.
- Often, administrative costs for self-funded program through a technology partner or other third-party administrator (TPA) are lower than those charged by an insurance carrier.
- In most states, premium tax – paid under a fully insured plan – is not applied to a self-funded plan, creating immediate savings for the employer.
How much flexibility?
With a self-funded approach, the employer has greater freedom to build a benefits program that fits its unique needs. You’re not restricted to the programs offered by insurance carriers, but rather can choose your own cost and utilization controls (e.g. case and disease management), service providers and networks, and health plan designs. Self-insured plans also benefit from the governance of ERISA, which pre-empts state insurance laws and thus allows uniformity in benefit offerings for multi-state employers.
How much insight?
Self-funding typically offers the employer access to data that provides insight into the status of the health plan. You can track key indicators such as total charges, payments and provider utilization. But simple summaries aren’t enough. Powerful data analytics tools can maximize the effectiveness of your data, allowing you to delve into the details to understand health plan trends and determine what is driving your costs. Using Benefitfocus Core & Advanced Analytics, this information can encourage smarter, more efficient plan design, as well as other aspects of your benefits program aimed at improving health and wellness for your employees.
Self-funding can provide an excellent vehicle to navigate the future of healthcare and benefits. The flexibility it affords, combined with the responsibility for plan expenses, produces an incentive for employers to both reduce healthcare costs and offer the benefits that are best suited to their employee population. While it’s not necessarily the best solution for every employer and comes with its fair share of disadvantages, you can benefit a great deal from learning more about your options and exploring what self-funding can do for you, your organization and your employees.
Learn more about how data analytics technology gives self-funded employers the visibility they need to control healthcare costs and guide better decision-making.
Benefitfocus.com, Inc. (“Benefitfocus”) provides this information on our website for general informational purposes only. Benefitfocus does not provide tax, accounting or legal advice, and information presented about those considerations is not intended as tax, accounting or legal advice and should not be relied upon for the purpose of avoiding any penalties. You should always review any planned financial transaction(s) or arrangement(s) that may have tax, accounting or legal implications with your tax, accounting and legal professional advisors. The information on the website may be changed without notice. While we try to update our website content on a regular basis, it may not reflect the most current industry or legal developments. The opinions expressed in this article, including are the opinions of the individual author and may not reflect the opinions or positions of Benefitfocus.