Self-Funded Insurance For Dummies

Today, faced with rising premiums, employers are moving away from more traditional fully-insured plans to self-funded insurance.

For many employers, there can be huge benefits to switching to a self-funded insurance plan. So, what makes self-funded insurance such a good investment? Let’s start at the very beginning and look at what a self-funded group health plan is.

What Does a Self-Funded Insurance Plan Look Like?

At a high-level, a Self-Funded Group Health Plan (or Self-Funded Insurance Plan) is where an employer is financially responsible for healthcare claims incurred by employees and is responsible for providing employee health care benefits.

There is a large amount of risk with this kind of plan, as employers are responsible for paying for claims. While fully-funded insurance plans are more expensive, they’re less volatile, charging a fixed premium to employers. A self-funded insurance plan can include medical, dental, vision, prescription medications and workers’ compensation. The costs incurred can vary depending on the use of the health services.

To successfully create and manage a comprehensive healthcare plan, migrate associated risk, and ensure the insurance plan meet the needs of employees, self-insured organizations will employ other entities to help them with their plan:

• An Established Trust – An employer will establish a special trust that includes both corporate and employee contributions to pay incurred claims.
• A Broker – An employer, while planning their insurance plan, may consult a broker to help design different insurance plan options for their employee population.
• A Stop-Loss Insurance Carrier – An employer will work with a stop-loss carrier to put together a stop-loss policy that will safeguard their organization against catastrophic claims.
• A Third Party Administrator (TPA) – This entity will be brought in by an employer to administer the plan, be responsible for any healthcare customer service, process the medical claims, and arrange care services such as access to a network of hospitals, clinics, or doctors, and other administrative duties.

To some, this may sound like a lot of cooks in the kitchen, but in reality, you need this team for self-insured success. Here’s an example on how all these moving pieces work together:

Under a Fully-Funded Insurance Plan:

• Your company pays a premium of $2,000,000.00 for their health insurance plan.
• At the end of the year your company only had $1,500,000 in claims and expenses.
• Your company “loses” $500,000.

Under a Self-Funded Insurance Plan:

• Your company determines that the worst case scenario for claims costs this year is $2,000,000. Your company pays $20,000 a month in fixed TPA costs and stop-loss premiums, and holds $1,500,000 in reserves for potential claims.
• At the end of the year your company’s claims total $1,000,000.
• By self-funding, your company retains the remaining reserves less the fixed costs, a total of $480,000.

The specific TPA costs, stop-loss premiums, and potential savings opportunities associated with a self-funded insurance plan are all subject to how you and your company create your insurance policy. To maneuver the different healthcare options and put together a comprehensive plan for your employee population, it could be very strategic to also consult a health benefits broker.

What are the main differences between self-funded and fully-funded plans?

The most fundamental difference between fully- and self-funded insurance plans comes down to one question: “who is going to assume the risk?” In this case, risk pertains to insurance risk, or who is going to pay the hospital when an employee needs to go to the doctor? A fully-funded insurance plan is structured so that an employer purchases health coverage from an insurance carrier for a per-member premium. While relatively stable, these premiums can fluctuate based on the size of the company, employee health, and healthcare usage.

Why are Employers Switching to Self-Funded Insurance Plans?

Companies are stepping away from a one size fits all, fully-funded insurance plan to take control of their healthcare insurance and fine tune their offerings to the needs of their employee population. Employers are also making the switch to a self-funded insurance plan to:

• Control Costs – By funding claims directly, an employer avoids many of the associated fully- funded insurance costs, including insurance premiums, administrative costs, and profit margins.
• Control of Benefits Plan Design – Employers are increasingly switching to self-funded insurance plans to take benefits design into their hands. Having the ability to tailor plans, allows employers to make changes to manage costs, provide benefits that make them competitive in the hiring market, and improve employee health through better care options.
• Better Understand Their Spend on Healthcare – Employers can see exactly where their spend on healthcare is going because plan payouts are based on a specific claim, not into an insurance payment pool. By having the ability to see where healthcare dollars are going, employers can create corporate initiatives to address high claim sources.

Self-funded insurance plans allow employers to control costs, understand where their spend on healthcare is going, and control the design of their healthcare plan and benefits offerings. Employers making the change to self-funded insurance plans are taking it one- step further and investing in technologies to set their self-funded insurance plan up for success.

How to Set Your Company’s Self-Funded Insurance Plan up for Success

Organizations that are looking to switch to a self-funded insurance plan to build health benefits packages to fit the needs of their population and control healthcare costs are setting their self-funded insurance plan up for success by:

Creating a Plan that Fits their Employee Population – Employers looking to set their plan up for success are opening up a conversation with a benefits broker to understand the different plans available was well as how their employee population size, risk tolerance, and other variables that could impact their healthcare plan.

Establishing Plan Administration – Employers are doing their homework and looking at all the available Third Party Administrators (TPAs) to determine which one is the best fit to oversee the claims processing, customer service, and administration of their self-funded insurance plan.

Integrating Health Analytics and Data Management – By leveraging a healthcare analytics solution, employers can tailor their healthcare plan to their specific workforce, identify and engage high-risk employees, and see the breakdown of their specific spend on healthcare.

Additional Resources:

• What is Health Intelligence?
• What is Health Analytics?
• What is a "Gap in Care"?