Self-Funded Health Insurance – Points to Consider Before Taking the Plunge
Talk to any business leader about healthcare benefits and you can bet they’re apprehensive (if not downright agitated) about climbing costs. For the majority, it’s their second largest expense after payroll. They feel gouged. What’s worse, they’re not sure they truly understand where that flood of money is going. These innovative people are used to tackling tough challenges, analyzing data and taking control.
They’re tired of battling the status quo. They want to find quality care at a fair price. They want to do better by their employees. And they want to get back to running their business.
Moving to a self-funded health plan has been the answer for many. The 2018 Kaiser Employer Health Benefits Survey reports that 61% of U.S. workers with health coverage are part of a completely or partially self-funded plan. And while that stat proves that self-funding is doable for a lot of companies, you’ve got to wade through the critical details and make your own determination.
What’s the difference between a fully insured and self-funded plan? It starts with how each plan handles premiums, claims and fiduciary responsibility.
In fully insured plans, businesses pay predetermined premiums (company and employee contributions) to an insurance carrier. These premiums cover the insurance company’s forecasted cost of care plus administrative fees, taxes and their profit margin. When claims for healthcare services come in, the carrier pays them (and therefore holds fiduciary responsibility). Regardless of whether the services rendered cost more than or less than the premiums, the employer’s cost is fixed. At renewal time, the carrier assesses the plan’s experience. It sets a rate for the coming year to encompass new projections and ensure profitability. (And in recent memory, that rate has always gone up.)
Self-funded health plans differ in that employers collect corporate and employee contributions, hold them in reserve and are financially responsible. They have authority over the plan’s assets and make all operational decisions. Rather than paying “up front” for employee claims, they pay as the claims are incurred. Therefore, they’re also positioned to benefit from positive plan performance. For instance, if premiums are held in an interest-bearing account and there are fewer claims in a year — there’s more money in the bank. The better that plan performs, the larger the business impact.
How plans are designed and contracted also separates the two models.
Fully insured businesses choose from “off the shelf” options available from their carrier annually. They work with a broker who earns a commission from the carrier.
Self-funded employers have options to tailor their healthcare plan to suit their employees. Some sign into an administrative services only (ASO) arrangement with a major health plan, which allows them to manage plan finances while still using a provider network that looks and behaves the same to their employees. Others go further, working with an independent third-party administrator (TPA) to maximize their assets and take more control of the providers and benefits they offer. Either way, self-funded companies also need a broker on their team to help guide the process and optimize plan performance.
Given this much information, executives often can envision the possibilities for their business. Before they jump in, we answer their questions, which typically focus on these traits of self-funded health insurance.
1. Choice and flexibility. Self-funding comes with the freedom to design a plan to address the specific needs of your workforce. For example, a company with a higher concentration of millennials may wish to include more family-oriented services and benefits. Or public sector agencies with very accurate head count and usage forecasts can build plans that deliver high-quality care alongside a balanced budget.
Because you’re in control, you can modify the plan when the needs of your members change. Like taking advantage of novel cost-containment solutions or navigation tools to lower medical and pharmacy spend. Or creating incentive programs that support informed choices by members, so they get the right care at the right place at the right cost.
Businesses that choose self-funding have more options when it comes to their partners, too. Besides selecting a broker, they may be able to choose their TPA and suppliers for add-ons such as pharmacy benefit manager (PBM). Those working with an independent TPA have the most flexibility, including opportunities to focus on providers offering quality care at the best possible price.
Additionally, federal laws govern self-funded plans. ERISA and other compliance requirements can be less onerous than increasingly complicated state mandates, contributing to ease of administration (and relief from state taxes and fees).
2. Cash flow. In fully insured plans, employers can expect to pay fixed premiums to the carrier every month. Self-funding companies lose this predictability. It’s their responsibility to maintain an adequate reserve to cover healthcare bills as employees consume services. So they must have an excellent cash management strategy.
Specialized brokers and TPAs often bring experience to consult on the unique financial opportunities of self-funding.
3. Risk. Although employers who self-fund have the potential to come out ahead at year end, they have more on the line each month. Fortunately, risk management vehicles are available to protect them. Stop loss policies limit the maximum claims exposure of your business and can mitigate potential cash flow challenges. There’s risk inherent in any healthcare program; the right stop loss structure can bring peace of mind that you’ve quantified and managed it for your self-insured health plan.
4. Cost. Healthcare carriers must pay taxes such as the Health Insurance Industry Tax (HIT), state premium taxes and state-mandated benefits, which they pass along to employers. While self-funded employers don’t pay these taxes (although there are some federally mandated benefits they must provide), they do incur fees (for stop-loss insurance, brokers and TPAs). Typically they can exert more control over profit margins for the costs in their plans.
5. Management and transparency. Pricing in fully insured plans can be frustratingly fuzzy. It’s like a black box: You can’t see your utilization. Rates are discounted, but the full fee is undisclosed. And it’s likely that the same services from different providers in your area come at tremendously variable costs. In short, you don’t know what’s happening in your plan or what’s driving your costs.
Self-funded employers have the power to construct a healthcare program with the right care and economics—plus more visibility. Depending on its structure, your self-funded plan can provide access to more data, which can yield information for better oversight and control of costs. Self-funded employers who contract directly for services generally have more details and benefit from the deepest insights.
The statistics say that more and more employers think self-funding is a better way to provide healthcare benefits to their employees today. If you feel your dollars are draining away without as much control as you’d like, or you’re interested in bringing more flexibility and options to your employees, you may be ready to test the waters of self-funding too.