Commentary: Historically, self-funding health insurance was an option that was more attractive to big employers, but that is changing. Self-funding as opposed to buying insurance from a traditional fully insured carrier has become a popular topic for discussion among small and medium-sized employers. As with just about everything in health care these days, this is driven in large part by the Affordable Care Act.
The primary advantages of self-funding are the opportunity for cost savings and plan flexibility. Very simply, if an employer self-insures and claims come in under projections, the employer pays less for the coverage. In regard to the ACA, self-insured plans may not be subject to the essential health benefit, community rating and medical loss ratio requirements. Additionally, self-funded plans avoid a portion of the health insurance tax that must be paid to traditional health insurers, as well as various state taxes. In total, the ACA taxes traditional plans at almost twice the rate of self-funded plans.
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That said, when an employer decides to self-insure, it is making a bet. So what are the factors you should consider when deciding whether to make this wager?
A key determinant is your claims experience. An employer that has a significant number of large claims or a high volume of claims ends up paying correspondingly high premiums. There may be a temptation to get away from those high premiums, but a smart employer will think like an insurance carrier thinks.
If history points to a lot of claims in the past, this could be a barometer that poor utilization may continue. Therefore, its important to understand your specific situation.
For example, we have a client with 84 employee lives on their insurance and they decided to self-fund the plan. On the surface, that might seem risky, but it made sense to them because they understand their workforce. Its a group of young employees who are not heavy users of the insurance. Based on this knowledge, the company was willing to make the move to self-funding, and that move saved them 24% on their insurance costs over the last five years.
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Self-funding works for them because they understand their population and their claims experience. Generally speaking, self-insured plans work best for small to mid-size businesses when they have very engaged employees, a younger or healthier workforce and good wellness plans.
A second consideration for employers is risk tolerance. Self-insured firms pay whatever their claims are out of their own pocket. So, if you have a bad year and your employees use their insurance a lot, youre going to feel the pain, as opposed to having a locked-in payment to a carrier. This can be managed somewhat through stop-loss provisions. A stop-loss policy puts a cap on out-of-pocket expenses; in other words, the employer is responsible up to the agreed-upon threshold, and the carrier is responsible for claims over that threshold. The employer pays a stop-loss premium for this protection.
Your tolerance for lump cash flow is also a factor. Employers who go for a self-insured plan have to be comfortable with the ups and downs of monthly or more frequent payments. Unlike traditional insurance with 12 equal monthly payments over the course of a year, self-insurers generally/usually must pay claims as the bills come in. Therefore, it becomes important to budget conservatively and be prepared for that big payment.
For employers who are intrigued by the concept of self-insurance but dont think theyre quite ready to take the leap, there are alternative approaches that are becoming increasingly popular.
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One option that carriers have been rolling out is minimum premium plans, a kind of hybrid between self-insured and fully insured. As in a self-insured plan the employer pays administrative fees and claims, but a monthly cap is placed on out-of-pocket costs. Typically carriers charge a higher rate for these plans than for a fully-insured plan, but if the program runs well the employer could save by not paying to the maximum funding.
Some employers self-fund a portion of their coverage, such as prescription coverage. Its a way to ease into self-funding while minimizing the downside risk. Even if things go awry, the total cost is not going to be as great as it would have been for self-insuring all of medical. You can mitigate that risk by purchasing stop-loss on the self-funded pharmacy plan. Additionally, its an opportunity to collect data on plan members, allowing for risk assessment and to get a better feel for how self-funding could work.
As employers strive for new ways to provide quality benefits to their employees while also keeping costs down, self-funding is likely to continue to grow as a viable option for smaller firms.
But that doesnt mean its a winning formula for every employer. The key is to follow this one important commandment: Know thyself.
John Crable is senior vice president with Corporate Synergies, an employee benefits brokerage and consulting firm.
