- Instead of trying to purchase a “one size fits all” health plan, self-funded plans can be customized to fit the needs of an employer’s workforce.
- Employers with self-funded plans control the health plan cash reserves, allowing them to maximize interest income (insurance companies otherwise generate interest income for themselves by investing premium dollars).
- Self-funded coverage is not prepaid, as it is when the employer pays premiums to an insurance company. Therefore, companies who self-fund their health plans have improved cash flow.
- Self-funded plans are not subject to conflicting state health insurance regulations and benefits mandates. Instead, these plans are regulated by federal law.
- Employers with self-funded plans are not subject to state health insurance premium taxes.
- Employers can contract with the providers or a particular provider network that will best meet the needs of its employees.
What Is Self-funding?
An employer has a self-funded group health plan–or a self insured plan–if the employer assumes the financial risk for providing health care benefits to its employees. Rather than paying fixed premiums to the insurance company who in turn assumes the financial risk, your employer pays for medical claims out-of-pocket, as they are incurred. Generally, employers who have self-funded plans will set up special funds to earmark corporate money to pay for employee medical claims.
Why Do Employers Choose Self-funding?
An employer may choose to offer a self-funded health insurance plan for a number of reasons..
How Self-funded Benefits Work?
Imagine you have made an appointment with your doctor when you are not feeling well. When you arrive at your doctor’s office, you will be asked to provide your insurance card to your physician’s office personnel. Your insurance card tells the doctor’s office what type of health plan you have and how it is administered, i.e. to whom your claim should be sent.After you have seen your doctor, a claim for payment for an office visit has been generated. Someone in your doctor’s office will prepare the claim by typing the information from your visit onto a claim form. This form is then mailed to the administrator–the entity that will determine how your claim will be paid–listed on the insurance card you provided at the time of your visit. Your employer may administer employee health care claims in-house, or it may use a third party administrator (TPA).The administrator then adjudicates your claim. Adjudication is the process of paying health care claims according to your health plan’s contract. Your health plan’s administrator will determine how your health benefits work and what payment is required for your doctor.
Your plan may require you to pay coinsurance or a deductible before your health plan pays its portion of your bill. Or, your doctor may participate in a Preferred Provider Organization (PPO) or another type of managed care plan and therefore will charge discounted fees to your plan. These and other factors determine how much of the claim the plan will pay, how much you will pay, and how much the doctor will eventually receive for services rendered. Once all of the payment issues are cleared up, your plan administrator contacts your employer for approval of your claim’s payment (and any other current claims). Your employer approves payment of the claim.After receiving payment approval from your employer, the administrator requests payment from your employer’s bank. The bank will wire the appropriate funds to the administrator, who will then send payment to your physician. Your claim is paid. This payment process generally takes two to four weeks.
What Is Excess Risk Coverage?
Excess-risk coverage is insurance sold to employers who offer self-funded health plans, in order to guard against unacceptable losses. Excess risk coverage protects against unforeseen catastrophic claims that would cost more than is budgeted in the plan, and that would therefore place undue financial burdens on the employer. There are two types of excess risk coverage:
- Specific coverage – insures against a single catastrophic claim that exceeds a dollar limit chosen by the employer and agreed to by the excess-risk carrier. For example, specific coverage would come into play if one of the covered participants was in a catastrophic accident and had claims that exceeded the agreed upon dollar limit (known as the specific deductible). In this case, the specific coverage would reimburse the employer for the covered expenses beyond that dollar limit.
- Aggregate coverage – insures against all the claims exceeding a specific dollar limit chosen by the employer and agreed to by the excess-risk carrier. If all the claims payable exceed the agreed upon dollar limit (know as aggregate liability), aggregate coverage would reimburse the employer for the excess.
There are a number of caps and funding mechanisms available that limit the employer’s liability and decrease their risk of claim exposure.
Cash Flow Advantages Of Self-funded Insurance Plans
Companies with self-funded insurance plans receive significant cash flow advantages. These advantages come from three primary sources: retention, utilization and taxation.
- Retention – Under a fully insured health plan, a company pays insurance premiums to pre-fund employee claims. A company with a self-funded insurance plan does not pre-fund its costs, but covers claims as they are incurred. This allows the company, not the insurer, to invest and receive a return on unused, over-budgeted funds.
- Utilization – At the end of a plan year in which claims have been lower than anticipated, a traditional insurer keeps the premiums and no savings are returned to the company. When claims received by a company’s self-funded insurance plan are lower than anticipated, the savings belong to the company alone.
- Taxation – Self-funded insurance plans are not liable for state health insurance premium taxes, which can amount to 2 to 3 percent of a premium’s dollar value. This is a direct, automatic savings to a company with a self-funded insurance plan.
The bottom line: all cost savings resulting from retention, under-utilization and state taxes can be invested, producing a positive return on investment for companies with self-funded insurance plans.
Financial Risks Of A Self-funded Health Plan
A company with a self-funded health plan assumes responsibility for paying employees’ medical expenses as they are incurred. Stop-loss insurance is often purchased to protect self-funding companies from high claims by limiting financial risk. Under fully-insured plans, companies pay fixed premiums, and the insurance carrier takes responsibility for paying claims. It is not unusual for small and mid-size companies to perceive that there is significant financial risk related to pursuing a self-funded health plan, particularly in comparison with the predictability and assurance afforded by fully-funded health plans. Yet this risk can be mitigated through strategic self-funded health plan design, opening the door to considerable cost savings for companies of all sizes.
Flexibility Of A Self-funded Health Plan
Benefit consultants excel at building self-funded health plan designs with multiple options matching the needs of employees with diverse lifestyles and financial circumstances. The flexibility of self-funded health plan designs allows companies to:
- Replace costly benefits that employees don’t value with lower-cost benefits that employees particularly desire.
- Exclude or limit claims resulting from risky and hazardous activities.
- Implement care management programs to direct participants toward the most efficacious, cost-effective medical care.
- Implement disease management programs that identify employees with chronic conditions and potentially catastrophic illnesses and help ensure that they are appropriately treated. Provide coverage for alternative treatment procedures, such as chiropractic services and acupuncture.
- Reimburse employees for the cost of activities that promote wellness (e.g., fitness programs, weight management programs).
