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Many employers with fully insured benefit plans share common misconceptions about self-funding. These include: “It’s more work,” “It is too risky,” and “We are concerned about the unknown outcomes.” Or, they don’t fully understand the self-funded approach, and they believe it’s too complicated and would be difficult to manage. However, the advantages of a partially self-funded health plan outweigh the potential drawbacks, and nearly every employer could better manage its’ health plan costs on a partially self-funded plan instead of a fully insured plan.
So what’s the difference?
A fully insured health plan is one where the employer pays a fixed monthly premium to the health insurance carrier in return for the carrier paying all plan member claims. If the premium collected is greater than the claims, the carrier retains the excess as profit. With a partially self-funded health plan, the employer contracts a health insurance carrier or third-party administrator (TPA) to administer all aspects of the health plan, including claims adjudication, but the employer funds the claims payments. Employers purchase stop loss insurance that would pay if any catastrophic claims, such as cancer or premature birth, were to occur. With this arrangement, the employer is paying the health insurance carrier or the TPA considerably less than a fully insured arrangement. Compared to a fully insured plan, where the employer pays a monthly premium to the carrier that covers the cost of administering the plan and paying the claims, with a self-insured plan, the employer pays less to the carrier or TPA for plan administration, and only pays for the claims processed that month. While claims vary each month, the employer reaps the rewards when few claims need to be paid, and the funds can be set aside in a reserve for future claims. The statistical likelihood that partially self-funded plans cost less can be attributed to the following:
- Elimination of carrier profit and premium taxes – Health insurance carriers carefully underwrite their contracts to ensure they will not pay more for a plan than what they’ve collected in premium. In the U.S., individual states impose a tax on insurance premiums that can range anywhere from 0% to 4% of the premium. Removing carrier profit and premium taxes can generate substantial savings in health plan costs.
- Flexibility – Self-funded plans in the U.S. are only subject to ERISA laws and not state health plan regulations and benefits mandates. This affords employers more flexibility to design health plans that are both cost-effective and meet employees’ needs.
- Transparency – Self-funded plans provide greater transparency as employers are able to view claims utilization data, which allows them to make more informed decisions to help reduce costs.
- Competitive Bidding – With fully insured plans, the employer’s premium is paying for the plan components, such as claims processing, network access, disease management and pharmacy, all bundled together. Self-funded plans can be unbundled and each component purchased separately, allowing the employer to shop around for the component that best meets its needs and price point.
For most employers, the combination of the above factors generates total plan savings in the range of 5% to 10% of total plan costs. For an employer with 500 employees, this equates to savings between $250,000 and $500,000 annually. Self-funding also often serves as the gateway to implement additional innovative solutions and strategies that reduce health plan costs, such as reference-based pricing.
Cynthia Borkoski is a Licensed Employee Benefits Consultant with USI Insurance Services. She holds a Bachelor’s Degree in International Business and earned her Master’s in Sales Management. For more information, contact your insurance broker or she can be reached at (786) 785-1173 or by email at cynthia.borkoski@usi.com.
