Employers are increasingly seeking out other group health insurance options beyond what is available through the normal insurance company channels. Nearly two-thirds of all American employers self-fund employee benefits to some extent, and the fastest growing component of that trend is in the small employer sector. The advantages to an employer are the ability to create an insurance plan that may avoid many of the costly government-mandated benefits (and taxes) that create a financial burden for many employers. You can customize your own plan (within certain guidelines) and provide solid coverage to your employees at an affordable rate.
Under a partially self-funded arrangement, an employer elects a specified level of risk and then through an administrator, purchases insurance protection against both any large claims and an aggregate of many smaller claims. The administrator pays all claims and utilizes a cost-saving network of doctors, hospitals and other providers. Here are some common advantages and disadvantages of self-funded health plans:
Perceived Disadvantages of Self-Funding
- Your poor current claims experience will mean that your plan will be costly:
- Self-funding may cost less than an insured plan, as you are not paying for taxes and profit in addition to insurance coverage.
- Budgeting the plan will be difficult.
- You can fund it much like a fully insured plan and plan savings
can accrue. Insurance protection is in place to protect cash flow.
- Termination of the plan may be difficult
- Insurance coverage is structured to pick up claims incurred in,
but reported after, the end of each plan year. There could be
termination charges that will need to be taken into consideration
when evaluating your options.
Reasons to Self-Fund
- Cash Flow Advantages
- Moving from a fully insured plan to a self-funded plan usually
results in about 3 months of relatively little new claims. During
this time, the previous fully insured carrier is still paying claims
incurred prior to the new self-funded plan year. This claims lag
allows your new self-funded plan the opportunity to build and
establish reserves to pay future claims.
- Reduced Insurance Overhead Costs
- TPAs often have lower overhead and expenses than a fully insured
plan, which results in an immediate direct savings of 3-5% for the
employer when switching to self-funding.
- Reduced State Premium Taxes
- In most states there is no premium tax for self-funded plans,
which results in an immediate savings since 2-4% of the current
fully insured planýs costs are premium taxes.
- Elimination of State Mandated Benefits
- Since self-funded plans follow ERISA, they are governed by
federal law and are not required to cover state mandated benefits,
which can be expensive and unnecessary. The employer will realize an
immediate 5-7% savings by eliminating these benefits. Employers can
also limit certain benefits where with a fully insured plan there
may be state required limits.
- Control and Flexibility of Plan Design-Benefits
- The employer can duplicate its current fully insured benefit
plan or redesign and tailor the benefits to meet the specific needs
of the employer. This means the employer can eliminate benefits that
result in plan abuses or high utilization. The employer can also
create special executive benefits.
- Control of Reserves-Return of Investments on Reserves
- A good portion of the fully insured premium is held by the fully
insured carrier as a state required reserve for claims and
inflation. Under self-funding, the employer maintains and controls
reserves and can invest or put them in an interest bearing account.
The employer retains the reserves when the claims do not
materialize, and there are no restrictions on reserves with a
- Improved Employee Satisfaction
- TPAs specialize in customer service. This includes dedicated
account representatives who know not only the employer's account but
the individual employees of each company. Claims examiners form a
relationship with employees and HR, so that they are not transferred
to a random person that is not familiar with the employee or the
- Claims Experience
- Under a fully insured program, if an employer's experience is
better than expected, the insurance company gains financially and
makes an unexpected profit. The insurance carrier does not refund
the excess profit to the employer.
- Even if an employer has a good experience, the insurance company
will still pass on a renewal based upon the insurance company's pool
of thousands of groups. You are not truly rated based upon your
claims experience and can be treated unfairly.
- With self-funding, your renewals are based on YOUR company's
claims experience, it is not based on thousands of other companies
that have no relation to your company or industry. You, the
employer, not the insurance company enjoy the advantage of favorable
claims experience. You, the employer, keep the savings.
Self-funding is not for every small business. Acceptance is not guaranteed like it is under state and national legislation. If there is high utilization within your firm, self-funding may not present the best option for your company.
The role of a competent broker is to help you analyze your choices and to implement a plan that makes the most sense for you and your employees.
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