Double-digit increases in medical and prescription costs are increasingly causing a number of employers to consider self-funding. With self-funding, the employer avoids certain Affordable Care Act taxes, state mandates and premium taxes. Self-funding also allows for better reporting and plan design flexibility.
But for small and midsize firms thinking of going this route, there are certain things they should know.
A fully insured business with 50 to 300 eligible employees is pooled through the carrier’s book of business, meaning the risk pool is much larger. One positive change that came out of the ACA was a mandate that 85 cents of every dollar spent must go toward claims and not administration. As a result, fully insured carrier rates are often more competitive than self-funded plans.
When weighing the advantages of fully insured vs. self-funded plans, consider these factors:
How do your demographics compare to industry norms? If you have a stable workforce and your demographics are better than industry norms, self-funding could be beneficial for the long haul.
Do you have strategies in place to control risk? Is your HR staff experienced in managing initiatives to control risk? Do they have the support of senior management? Understanding and minimizing risk is a key component to managing a well-run self-funded plan.
Are the carriers rolling out fully insured plan designs in your region that a self-funded plan can’t compete with? In some regions, carriers offer limited network plans, staff models and performance-based networks that provide discounts under fully insured arrangements. These may not be available with self-funding.
Are you prepared for fluctuating claims? In a true self-funded situation, you, as the employer, must be prepared for low claims one month and high claims the next. Many companies tackle this challenge by setting up reserves to help mitigate the fluctuation.
Consider alternative funding arrangements. You may be familiar with true self-funding, but there are other alternative options like partial self-funding, retrospective premium arrangements and minimum premium arrangements.
Consider captive arrangements. With a captive, an administrator pools multiple employers that enter into a risk-sharing agreement. Captive arrangements need to be evaluated with caution. Many have poorly drafted policies, poor risk pools and inadequate capital and can require multiple year buy-in. However, larger, more established captives with a healthy risk pool may be worth reviewing.
In our experience, the majority of employers with 300 or fewer total eligible employees have found carriers’ fully insured contracts to be more competitively priced and, therefore, choose to remain fully insured.
Middle market employers
Groups with 300 or more employees are considered by most carriers to be fully credible. Carriers consider 100% of the group’s claims when calculating the premium rates and projected renewal costs. Even though your claims are fully credible, carriers will provide reinsurance protection, which is usually pooled across their book of business to ensure competitiveness. In addition, the larger the group size, the lower the administrative costs per employee. In this market segment, administrative costs can range from 5% to 15% of total spend.
Factors to consider:
Consortium arrangements. In some situations, employers may have access to consortium arrangements in their region. Consortiums pool employees from several member organizations to gain buying power for health insurance, prescription benefits and other business services.
Limited or performance networks. Performance networks are smaller groups of highly rated and efficient medical providers. These limited networks can save employers and insured members money on their healthcare over time.
Additional strategies may include:
· Disease management
· Wellness programs
· Dependent eligibility audits
· Spousal programs
· Prescription carve-out programs
· Consumer driven health plans/value-based insurance design
When an employer’s claims are fully credible, it makes sense to implement strategies to mitigate risk and encourage employees to become actively engaged to control costs.
Many factors come into play when deciding on the funding mechanism that best fits your company profile. It makes sense to review this information in detail with your insurance carriers and broker partners to determine the best way to provide quality, affordable benefits to your employees.
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