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As employer healthcare spending continues to rise, self-funded health plans remain a popular option for employers aiming to regain control.
Both large and mid-size employers embrace the model’s approach to increased transparency and flexibility, but find the most significant savings in managing claims expense. In a fully-insured model, employers pay a pre-determined premium amount set by a carrier to cover annual claims expenses. When the actual cost of claims incurred falls below the premium, carriers can keep the difference.
For self-funded plans, rather than paying a pre-determined premium, claims are paid as they actually occur. The impact on cash flow is significant: there are fewer fixed costs out of the employer’s control, and more ability to control the variable pool of claims expenses.
In addition to increased financial control, companies can benefit from these five advantages of self-funded health plans:
Because fully-insured arrangements rely solely on fixed costs managed by a carrier, they are more opaque to employers. It’s not uncommon for companies to not be aware of its actual claims relative to the premium paid. On the other hand, companies that move to self-funding have complete visibility into each claim incurred; enabling them to actively manage these costs and secure savings.
Self-funded plans allow employers to create tailored health solutions that reduce overall claims expense for their population. Employers can more easily implement employee intervention programs and make strategic decisions about investment of funds, plan options and the professionals that will partner with the organization. They can also choose providers, become part of a proprietary network and generally put their employees in a position to make smarter consumer choices.
While fully-insured groups transfer risk entirely to a carrier, they miss opportunities for significant savings. In a self-funded model, employers purchase stop-loss insurance to protect against the financial risk of catastrophic claims. Instead of simply transferring risk, employers are proactively managing it.
The vendors you trust to manage your healthcare investment have an impact on your company’s financial health. Carriers administering fully-insured plans may utilize multiple profit margins and commissions, while self-insured vendors (typically third-party administrators) have limited external margin and transparent commissions. Most importantly, these fees and margins should be transparent and available.
Fully-insured health plans are typically subject to greater local regulation. Each state has different tax rates (between 2-3%) and mandates, creating a complex compliance environment. For self-funded plans, government intervention is limited to the federal level and there are no state taxes.
Self-funded employers also avoid additional fees and costs associated with fully-insured arrangements. Administrative costs, taxes, margins and profit can account for up to 20% of an employer’s total cost.
