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In recent years, the need to curtail healthcare spending has given rise to an increasingly popular method — self-funded health insurance. Compared to traditional fully insured plans, which involve payment of a set premium to an insurance company to cover the costs of care, self-funded plans can offer greater flexibility, control and cost-saving opportunities.
Instead of paying premiums to traditional health insurance companies, employers will fund their own plans—either partially or fully— and accept the responsibility for payment of any healthcare expenses incurred by enrollees. Employers usually reach out to consultants or third-party administrators (TPAs) or health plan administrators for assistance in designing plans that meet the needs of their employee populations.
TPAs help employers determine the level of stop-loss coverage they need to cover extremely large claims based on their risk tolerance and claim history. In addition, TPAs create customized health benefit plan documents, select appropriate provider networks and administer the plans.
It is important to select a TPA that is able to coordinate all of these steps while having your best interests at heart. The process should be completely transparent to you as the employer, with the focus on returning control into your hands.
Compared to traditional fully insured plans, which involve payment of a set premium to an insurance company to cover the costs of care, self-funded plans can offer greater flexibility, control and cost-saving opportunities.
Self-funding allows smaller and midsized business to be much more flexible in the benefits they offer their employees, crafting plans that meet the needs of specific workplace populations. This flexibility can control costs by encouraging healthy behaviors and discouraging inappropriate healthcare utilization. Because self-funding allows for greater involvement at the company level, population management strategies such as smoking cessation or weight loss programs can be implemented easily. High-value services such as preventive care and medication adherence regimens give employers more control of positive outcomes while increasing workers’ quality of life and decreasing costs. Self-funding puts employers in control by allowing them to utilize claims data in order to identify and better utilize low-cost providers.
Health plan administration costs are significantly lower—typically between 3 to 5 percent—than those associated with a fully insured plan, which the International Foundation of Employee Benefit Plans (IFEBP) reports range from 15 to 20 percent. Self-funded companies also can avoid state premium taxes—typically 1.5 to 3.5 percent, depending on the state—and costly mandates on insurers’ plans, which can add between 5 to 7 percent to plan costs.
Self-funding most often refers to partially self-funding, meaning that an insurance company (reinsurance) is still involved covering the majority of the risk. Reinsurance carriers have adapted to the need of small and mid-sized employers by offering special provisions that further address the perceived risk of a self-funded arrangement. These include lower specific deductibles that in some cases expose the group to less than $25,000 of risk for an individual. They also have implemented provisions that help to level out expenses in higher than normal months of medical claims.
Maximum cost can also seem to be a risk of self-funding. However, the prevailing thought is that when an employer is faced with high medical claim costs within one year, the value, not the risks, of self-funding is most transparent. Access to information and data on the drivers of medical cost and flexible solutions are critical advantages of self-funding. A fully insured renewal after a high-cost year will offer a huge risk of double-digit rate increases, not solutions.
All these factors, as well as consistent results and proven case studies in almost every industry and every employer size show that risk is mitigated by the strategies and value imparted by an experienced and proven health plan administrator.
Most employers can benefit from switching from a fully insured to a self-funded model. According to a 2011 survey of employer-sponsored health benefits conducted by the Kaiser Family Foundation and the Health Research & Educational Trust, 60 percent of U.S. workers are insured by self-funded or partially self-funded plans. In the past, these benefits were thought to be reserved for only large companies, but that’s no longer the case. Small and mid-sized employers with as few as 50 employees are reaping the rewards in the form of lower costs and greater control over their plans.
