The Employer’s Guide to Self-Funded Health Insurance

Costs for health insurance continue to rise, particularly for small employers. On average, employers pay up to 25% more for the same coverage as a large employer. This cuts into their margins and prevents them from hiring the talent they need to advance their business. Self-funding your benefits plan can drastically reduce your annual spend for providing benefits. In the following article, we go through what self-funding is, what self-funded employers should know about their plan, and how they can work with a broker who has access to claims data to obtain a stop-loss quote which is a necessary mechanism for managing the risk that comes with a self-funded plan.   

What is self-funding?

A self-funded, or Self-insured plan, refers to plans in which employers provide benefits to their employees by paying claims as they occur, instead of paying a fixed premium to an insurance company. 

The employer assumes the financial risk for providing all benefits outlined in the plan. 

Typically, a self-insured employer will set up a dedicated fund or trust fund to set aside the money to pay claims when they’re incurred. It’s important to note that the employer only is liable for the claims covered under the plan as outlined. Employers like this option because it allows them to avoid carrier mark-ups and keep the unused money that has been allocated for insurance claims, rather than paying a fixed premium. It’s estimated that carrier markups are between 15-25% for fully-insured plans, which is huge expense most employers would like to avoid. 

In a self-funded plan, the employer assumes the claim risk, and purchases reinsurance as a stop-loss policy to protect the plan from large or unexpected claims.

Are self-funded plans common? 

Self-funded plans are more common in large firms, which intuitively makes sense, as the risk of a high claim is spread across a larger population of employees and typically larger firms have larger balance sheets that would allow them to self-fund and spread out the risk across a large population. As expected, covered workers in large firms are significantly more likely to be in a self-funded plan than covered workers in small firms (82% vs. 21%). That said, some of the companies that would benefit the most from self-funded plans are small businesses looking to manage costs. Self-funding is becoming more common for smaller employers, particularly if they have a broker who is willing and able to secure the group stop-loss reinsurance to mitigate some of the associated risks. 

How is self-funding different from fully insured? 

55% of covered workers at small firms are enrolled in a fully-insured plan (3-199 workers) according to the Kieser Family Foundation. 

With a fully-insured health plan, the employer pays a certain amount each month (the premium) to the health insurance company. The insurance company assumes the financial risk for providing the benefit to the employees. This is, the insurance company covers the costs of the employees’ healthcare. The insurance company or Health Maintenance Organization (“HMO”) assumes the risk in exchange for an agreed-upon premium amount. The employer is not responsible or liable for claims. Typically, these plans cost more money than a self-funded plan every month, but as mentioned, the employer is shielded from unexpected high-cost claims which is the key benefit of this plan type. 

How is self-funding different from level-funded or minimum premium insurance?  

With a level-funded plan, an employer pays a health carrier the same monthly amount to cover the estimated cost for expected claims, the premium for stop-loss insurance that covers health care costs over a set dollar amount and plan administration costs. An employer’s premium is divided into a predetermined monthly dollar amount that is set aside or earmarked to cover claims, and payable to an insurance company. Claims up to a maximum liability are funded by the employer and the remaining premium is remitted to the insurance company to cover non-claim liabilities (e.g., overhead, taxes, and risk charges).

A key advantage of level-funding is the employer is not at additional risk for claims above a certain amount but could be reimbursed if the claims do not reach this amount for the insurance company’s liability to kick in. But, the premium is only slightly lower than a fully insured plan usually. The employer still bears the risk of the claims up to this set amount and is responsible to pay “reserves, terminal fees, or a “terminal fee adjustment” upon termination. There are often a lot of hoops to jump through to get a refund for the claims that exceed the employer’s liability. 

Level-funding or partially self-funded plans can be a helpful stepping stone to a self-funded plan. 

Is partially self-funded different from level-funded? 

You may also hear the term “partially self-funded.” This is the same as a level-funded plan when talking strictly about health insurance. However, a partially self-funded plan could also be referring to other benefits being self-funded while the primary health insurance policy remains fully insured (e.g. self-funding short-term disability while retaining a fully insured health plan). 

Is an HRA self-funded? 

An HRA, or Health Reimbursement Account, is a type of self-funded, tax-favored program that can be offered with any type of health plan. Most often, they’re paired with a high-deductable health plan. Then, the employer funds employees’ individual HRAs using premium savings from switching to a high-deductible plan. In most cases, the high-deductible plan would still be fully insured, but it also may be self-funded. If the high-deductible plan is fully insured and the HRA is self-funded, this would mean that the total plan is partially self-funded. If both are self-funded, this would mean the total plan is self-funded.

Why would you want to move to a self-funded plan? 

Self-funding makes sense for employers who want added plan design flexibility, reduced expenses if they’re able to manage their risk through stop-loss insurance, pharmacy savings programs, and year round rewards and recognition programs to encourage healthy behavior. An employer can self-fund all or some benefits including medical, prescription, dental, vision, short-term disability (weekly income), life insurance, and/or accidental death and dismemberment (AD&D) plans. All self-funded employers purchase Stop Loss Reinsurance Coverage to protect the plan from extreme loss or high claims. 

Why do you need a third party administrator when you self-fund? 

When you decide to self-fund, you’ll need a Third Party Administrator to handle the administration of your plan including enrollment, claims processing, customer service, ID cards, verifying EOBs and so forth. Most employers find a trusted Third Party Administrator through their broker. Some TPAs are very antiquated and use paper billing and substantiation processes. Others use technology like TPA Stream’s Claims Harvesting and Employer Invoicing products to provide a seamless servicing experience for your employees. You should work with a TPA that has made the switch to automate much of their functions to reduce the possibility for error and improve customer service for your employees. 

When does self-funding make financial sense? 

Practically, self-funding makes financial sense when you have 15 or more employees, you have a stable employee base with a better than average claims experience or low utilization, and as a company, you have a healthy cash flow, strong balance sheet, and adequate risk tolerance. 

Self-funding your plan does not make sense if you have poor cash flow as a business. If your employees have high-cost conditions, this would also mean that you may be better off selecting a fully insured plan to cover these high-cost conditions. 

Is self-funded right for my company?

Self-funding could make a lot of sense for your business, particularly if you have strong cash flow and a low volume of health claims for your employees. Traditionally, a broker will review demographic data for your population and work with an underwriter to try to secure the stop-loss insurance you’ll need to make self-funding make sense from a risk standpoint. However, it is difficult to get stop-loss insurance. According to industry experts, it is estimated that less than 10% of employers who evaluate moving forward with a self-funded plan are able to get a quote for stop-loss insurance. This is a huge problem because without it, self-funding does not make sense for a majority of companies who would benefit most from it, those who are critically managing cots. 

How can my broker qualify our group for stop-loss? 

We’re on a mission to help benefits work better for employers, brokers, and administrators. Using our Claims Harvesting technology, we’ve built a platform that gives brokers the details of the important claims and related risk factors they need to make a plan recommendation for self-funded, level-funded, or a recommendation to stay with a fully insured plan depending on the exact needs of your group. 

As a result of using our software, you can expect a lower cost and a plan that fits your specific needs, custom-built for you with the knowledge of how the plan will be likely utilized. No more guessing health conditions or “maybes.” No more burdensome and inaccurate individual health questionnaires to administer. Instead, your broker will handle your biggest pain points like rising costs, labor-intensive open enrollment, and lack of transparency in plan use. 

We can connect you to a broker who is using our Beacon for brokers product or you can learn more here. 

Related:

• Self-Funding: What’s Claims Data Got to Do With It? 
• Healthcare Claims Data Is Becoming Expectation… And Is Possible 
• What Can Employers Do to Lower Health Insurance Costs?

Sources:

• Section 10: Plan Funding – 9805 | KFF
• What is Self Funding? – Health Care Administrators Association (HCAA) 
• Stop-Loss Insurance 101
• Partially Self-Funded Plans with an HRA 
• Hidden mark-ups hike up small businesses’ healthcare costs by 25% — here’s how to avoid overpaying