As a benefits administrator or business owner, you know providing health benefits to your employees is essential to retaining and recruiting a talented, loyal workforce. Health care benefits are one of the top expenses for most businesses and during the COVID-19 pandemic you are probably taking an even closer look at your benefit options.
While you’re evaluating your current health benefits package and determining whether you want to make changes, you may want to consider self-funding. Self-funding is one of the ways employers can control their health care costs. But there are risks and it’s not for everyone
What is self-funding?
Self-funding one’s health plan involves paying the health claims of the employees as they occur. With a fully funded health plan, the employer pays a certain amount each month (the premium) to the health insurance company and knows exactly what their plan is going to cost each year. In return, the insurance company covers the costs of the employees’ health care with no additional risk to the employer. However, if the employees are healthy and don’t use much health care, the employer will have spent more than the claims actually cost.
In addition to the potential cost savings groups can experience by self-insuring, self-funded plans are not subject to state premium taxes and are exempt from many of the provisions of health care reform. Self-funded groups also have more flexibility in their plan designs and receive much more detailed reporting.
Employers who self-fund own and assume the financial risk of providing benefits to their employees by paying claims as they are incurred, and the carrier or third-party administrator provides administrative services and stop-loss coverage for a monthly fee. Self-funding is ideal for employers with 25 or more healthy employees who have cultivated a culture of wellness and engagement.
Self-funding vs. level-funding
For some employers, a pay-as-you-go approach makes financial sense. Traditional self-funding allows employers to pay for claims as they are billed (usually weekly), so when claims activity is low, employer costs are low.
For other employers, traditional self-funding carries too much financial risk and unpredictability. Level-funding offers all the benefits of traditional self-funding with the added feature of stable monthly costs, so groups can reap the financial rewards of being self-insured. With level-funding, employers fund a fixed amount of money each month based on their enrollment and projected claims expense, giving the employer more financial stability.
For example, Priority Health uses the money as needed to pay claims. At the end of the year, if claims paid by Priority Health are less than the funds paid by the employer, Priority Health sends a check to the employer for the overage. If claims paid by Priority Health exceed the monthly amount funded by the employer, Priority Health will pay the claims as incurred and the employer will reimburse the advanced funds at the end of the year.
Level-funding is an affordable option for employers looking to maintain their employer-sponsored benefits because payments do not fluctuate monthly due to claims experience. This program is ideal for a company moving from a fully funded plan to a self-funded plan and makes that transition easier.
Employers with self-funded plans that want to limit their exposure to catastrophic health care claims may purchase stop-loss insurance, also referred to as reinsurance. Stop-loss offers protection for the employer against unlimited financial liability by setting risk limits at the beginning of the plan year for individual and group health claims based on claims history.
The decision about funding is about how you want to pay for the cost of your claims and how risk-tolerant your company is for fluctuating costs. Most self-funded plans have a “bad year” every 5 years, so moving to a self-funded plan should always be a long-term strategy. Make sure you have done a thorough analysis of your experience data and know your historical risk. Self-funding is just one aspect of plan design; talk with your health insurance carrier about your different plan design options.
David Quinn has more than 20 years of experience in health care. As the director of sales and client service at Priority Health, he oversees the new business and retention teams for the large group market and specializes in self-funding and experience rated products.