Most employers are always searching for ways to lower their company’s spending on their health benefit plans. Some modify plan design, some change carriers, some shift more costs to employees. And some employers move from offering an insured health plan to self-funding.
In a self-funded—also known as self-insured—health plan, the employer takes on direct financial responsibility for employees’ health care costs. Rather than being part of a larger risk pool, an employer that self-funds takes on the risk for its employee group alone. All of a health plan may be self-funded, or an insurance contract might be purchased to cover certain types of claims. Most self-funded employers buy stop-loss insurance to cover against catastrophic claims.
Being exempt from state insurance laws and mandates and not having to pay premiums on a regular basis to an insurance company can result in substantial cost savings. Yet, many employers, especially smaller employers, shy away from self funding, perceiving it as too risky. According to the 2007 Kaiser Family Foundation Health Benefits Survey, 55% of all employees covered for health care are in self-funded plans. Among employers with 200 or more workers, 77% of employees are in self-funded health plans, compared to 12% of employees in firms with 3–199 workers.
Self-funding health benefits will be the right approach for some companies, and not for others. If your company is mulling over moving to a self-funded health plan, here are some basic preliminary considerations—
• Self-funding can give you more control over your health plan than you have with an insured plan. Your company can customize coverage, since you are not buying a prepackaged product. Though self-funded plans are subject to ERISA, they are not bound by state insurance laws, so a self-funded plan is not required to include types of coverage required by state insurance law. You can create a plan that truly meets your employees’ health care needs. And, except for stop-loss premiums, you also won’t pay premium taxes as you do with an insured plan.
• With a self-funded plan your company pays health claims as they are incurred, rather than paying a premium to an insurance company on a regular basis regardless of whether employees are filing any claims. This can be attractive, especially during periods when claims are low. The flip side, of course, is that you need to be able to handle large claims or a steady stream of moderate claims when they do arise.
• A company with a self-funded plan does not need to worry about the financial wherewithal of an insurance company. If you self-fund, however, you do need to consider your own company’s cash flow, to be able to handle claims as they arise, and also your company’s position in the event of a series of large claims, or even one truly catastrophic claim. As noted above, most employers that self-fund carry stop-loss insurance, to limit their liability for either or both large individual claims or claims in the aggregate in excess of a specified amount.
• When you pay a premium to an insurance company, you’re paying for more than just claims; the premium will take into account the insurer’s administrative and other costs (overhead, advertising, technology, etc.), some allowance against risk, a profit margin, etc. Companies that self-fund won’t have to pay all these hidden costs, but they will incur other expenses, e.g., the cost of claims administration (whether handled internally or by a third-party administrator) and the cost of stop-loss insurance.
• Most insured health plans are packaged with a well-developed provider network, and if you’ve had the same plan for a while, your employees are likely settled with their choice of doctor, hospital, etc. If you move to a self-insured plan, you’ll need to make sure you arrange to have a suitable network in place.
• Workforce demographics can make self-funding a more or less attractive option. Of course, young and healthy employees can suffer large claims, and older workers won’t necessarily break the bank. But remember that self-funding means that your company alone (other than the stop-loss carrier) will bear the risk for your employee group, so it’s worth closely analyzing this risk with a professional who can give you well-reasoned estimates of your potential liability.
