As healthcare costs continue to spiral out of control, many businesses are considering switching their traditional, fully insured health coverage to a self-funded health plan. Making this switch can save employers money, often $1,000 per employee--which can have a dramatic impact considering the significant expense of health insurance costs for most organizations. After all, health insurance premiums are usually the second largest expense item a company has.
When an organization changes to a self-funded health plan, it is simply choosing to finance healthcare premiums in a different way.
The Benefits and Drawbacks
Employers with self-funded health plans gain significant financial benefits, insight into the claims that are incurred (on a depersonalized basis), and the power to customize the plan design and benefits to better meet the needs of employees and the employer. And, from the employees’ perspective, the experience is seamless—they receive a health plan card with a major insurance company’s name on it that they can use at almost all hospitals and doctor offices nationwide just as they do with the current insurance company.
Often employers hear self-funded health insurance and fear that they are somehow taking significant or even unlimited risk when, in fact, a self-funded health plan has two protective layers of insurance—one called Specific and the other called Aggregate. The specific caps the company’s liability to, say $30,000 per employee. Any claims above $30,000 are picked up by the insurance company. Aggregate insurance caps the company’s total liability in the event that an extraordinary number of employees hit or exceed the Specific cap of $30,000. The savings that self-funded plans deliver equals roughly the profits your health insurance company makes on the plan.
Under a self-funded health plan, employers gain full transparency on claims incurred, which allow them to determine if claims are expected to be ongoing or have been resolved. This transparency can also allow them to offer free blood pressure prescriptions, for example, if there happens to be a number of employees at high risk of heart attack or stroke.
Who Handles the Plan?
Business owners use a third-party administrator to perform all of the operational functions, including paying the healthcare providers and hospitals, negotiating claims, and answering employee questions, among other things. The administrator provides all of the services that your current health insurance company performs. Even when managed by a third-party administrator, the health plan premiums are almost always lower than those associated with fully insured healthcare plans.
When implementing a self-funded health plan, we encourage business owners to pay a fixed monthly amount into an ERISA account in the company’s name from which fixed administrative expenses and variable claims are withdrawn. We recommend that businesses budget monthly an amount that represents the worst-case scenario, and then true up at year end and harvest any savings.
Who Are These Plans Good For?
Self-funded health plans are not for everyone. We estimate that they make good financial sense for 7 out of 10 employers who have 25 or more employees, and we recommend that those businesses with particularly unhealthy employee populations use a fully insured health plan. When deciding whether or not adopting a self-funded healthcare plan is the right choice for their organizations, employers should have a healthy balance sheet and cash flow, be comfortable they understand how self-funding works and that this is a long-term strategy that is highly likely to yield savings. In fact, our third-party administrators have a 95% plus retention rate year in, year out, and the clients that leave self-funding do so because they have been acquired or have gone out of business (not due to health plan expenses, it should be noted). Business owners should consider self-funding if they are looking to reduce healthcare cost and put the gains realized back into their organizations.