When you use an insurance carrier to offer your employees a traditional, fully funded health insurance plan, you are forced to pay significantly high costs for the benefits that you offer your employees.
As such, health insurance is usually the second biggest expense for employers, besides payroll. Being able to save money on health insurance can offer you significant financial benefits. With a stretched budget and rising healthcare costs looming over you, wouldn’t you want more affordable health insurance and save $1000 per employee if the option were available to you?
You can, by switching to a self-funded health plan.
What Is a Self-Funded Health Plan?
With a self-funded health plan, you, as the employer, choose to pay for your employee healthcare benefits in a different manner. Employers who self-fund their health plans are often said to “own” their health plans, while those who buy insurance from a health insurance company “rent” that health insurance company’s plan. With the services of a third-party administrator, the plan collects premiums and then pays claims and administrative costs as they are incurred, rather than paying a fixed premium to an insurance company in advance.
If claims are lower than expected, you get to keep the savings or invest it to grow your business—you get no such advantage if you use an insurance carrier. If the claims in a self-funded health plan are higher than expected, however, you are protected by two levels of stop-loss insurance, known as specific and aggregate. This insurance will pay all claims and excess costs—without limit—above a fixed and well-documented dollar figure.
How Will You Save $1000 per Employee?
By choosing to own your health insurance plan, you do not have to pay any money for care that your employees do not use, for high administrative overhead or to feed the profits of the health insurance company, all of which can lead to significant savings. Most employers hire a third-party administrator to maintain the plan, to keep it in compliance and to process all of the claims and paperwork, but the costs of such an administrator is still almost always lower than an insurance carrier. What is more, self-funded health insurance plans also aren’t subject to state health insurance premium taxes, saving you approximately 2 to 6% of the premium’s dollar value. You might also avoid large annual premium rate increases.
The costs of a self-funded health insurance plan will vary depending on the number of employees enrolled in the plan, the health and demographics of your employee populations and what coverage you decide to provide, but, in most cases, they deliver significantly lower health costs than fully funded plans.
The Other Benefits Associated with Self-Funding
Other than the financial incentives you receive from switching to a self-funded health plan, there are myriad other benefits that you’ll enjoy. You will have increased control to be able to customize your plan design to meet the unique needs of your employee population instead of purchasing off-the-shelf products. You can pay for the benefits that your employees want and need and avoid paying for what they don’t need.
You’ll have greater claim transparency as well. And you’ll also benefit from improved cash flow since you won’t have to pre-pay for coverage. You’ll also enjoy less regulations—because self-funded plans are regulated under the federal ERISA law, they don’t face benefit mandates or conflicting state health insurance regulations.
Is Self-Funding for Everyone?
Though highly advantageous, self-funding isn’t for everyone. Employers who self-fund must have the financial resources to meet their healthcare claim cost obligations, which can fluctuate. If you have poor cash flow or high debt, then self-funding isn’t a viable option for you. Finally, employers with fewer than 25 employees or with a particularly unhealthy employee population likely won’t benefit from self-funding.
If you’re looking to control costs and save your organization money, self-funding may be the answer.