An increasing number of employers are converting from fully-insured plans to self-funded insurance plans for several reasons. Self-funding insurance plans refers to the practice of company owners directly providing employees with specified health benefits. This is a decision that comes with a certain level of financial risk for an organization. Among the various types of benefits that can be self-funded are the following: dental, vision care, prescription drugs, short-term disability, HMO, PPO, and POS.
Initially, most organizations that had decided to take on self-funded insurance plans were large companies. However, small businesses are also now more frequently choosing this alternative insurance option for their employees. According to a February 2018 report from the Employee Benefit Research Institute, 40.7 percent of private-sector employers in 2016 said they self-insured at least one of their healthcare plans. This is compared to 29.7 percent of businesses that used this practice in 2000. Additionally, the proportion of small employers (fewer than 100 employees) who offered at least one self-insured plan increased from 13.3 percent in 2013 to 17.4 percent in 2016.
Self Funded Insurance vs. Fully Insured Plans
One of the primary differences between self-funded insurance plans and fully-insured plans — aside from the former being employer-sponsored by definition — is that the latter obligate an organization to pay an insurance provider a premium for coverage. The insurance carrier will then pay all health claims based on the coverage amount explained in the insured’s policy. Self-funding also allows employers to customize coverage options by choosing a plan tailored to address their unique needs. Self-funded plans directly fund healthcare costs thanks to stop-loss insurance, which is designed to cover large claims and cap a business’s losses to a specific amount determined by the employer.
Employees who receive self-funded insurance incur payroll deductions to gain coverage. At the same time, employers end up using these funds to cover a certain portion of healthcare claims, reinsurance costs, and administrative costs.
How Does Self-funded Insurance Work?
Self-funded insurance plans contain regular fixed costs, much like traditional monthly insurance premiums. Some of these expenses include administration fees and stop-loss premiums. Employers can sometimes establish a trust fund to pay claims and will frequently resort to a third-party administrator (TPA) to judge or process said claims. Certain employers may also elect to handle claims internally rather than delegate claims-related tasks to a TPA.
Benefits Of Self-Funded Insurance
There are several advantages to opting for self-funded insurance. One of the main benefits of this alternative option is the lower costs that employers incur.
Lower Costs & Less Restrictions
When companies use TPAs to handle their self-funded insurance plans, these administrators can frequently identify more cost savings via greater clemency in pushing high-quality, low-cost healthcare providers. The outcome of this is an instant decrease in claims-related expenses, although the quality of the medical care of benefits employees receive is preserved. TPAs can also help customize plans so that they lack stringent restrictions.
Lower Organizational Expenses
Self-funding can also lead to a reduction in administrative expenses. This option allows organizations to avoid costs related to claim reserves, insurance provider profit margins, premium taxes, and risk fees. Furthermore, companies can also become free from the high costs associated with the Affordable Care Act’s Health Insurance Tax.
Stronger Cash Flow For Employers
Employers that self-fund can also enjoy stronger cash flows for their businesses. Additionally, self-funding entails that claims only need to be paid as they are incurred instead of on a monthly basis. This means that employers can maintain funds in their bank accounts for longer stretches of time, and thus, they can continue to accrue interest.
Is Self-funding A Good Fit For Your Company?
Self-funding may be a good fit for your business if:
- You wish to better allocate money spent on healthcare;
- You want the capacity to customize your healthcare benefits;
- You understand the degree of financial risk you are undertaking in your business;
- You would rather preserve extra funds not spent on claims;
- You are aiming to reduce administrative costs; and
- You wish to avoid paying state premium taxes.
Seeking More Information About Self-Funded Insurance
Speak to the experienced PEO (professional employer organization) consultants at BenefitCorp in Dallas or Denver to learn more about self-funded insurance models.
Founded in 1995 by an ER trauma nurse, BenefitCorp is dedicated to providing clear and effective guidance on employer-sponsored healthcare coverage, BenefitCorp simplifies and streamlines the coordination, completion, and quality assurance of insurance, HR, corporate payroll and retirement benefits for both big and small clients.
BenefitCorp will customize solutions based on your organization’s unique needs. Moreover, they will help you ensure that you are in compliance with any new federal, state, or local employment and healthcare laws, including the Affordable Care Act. Their experts will provide guidance on medical stop-loss and insurance, benefit strategy design and development, property and casualty insurance, and the filling out of forms. BenefitCorp also offers bilingual support and assistance with employee online enrollment.