There has been a steady increase of employees covered by self-funded health insurance plans in the U.S. over the last two decades. According to the Kaiser Family Foundation, the percentage of self-funded employees grew from 44 percent in 1999 to a record high of 67 percent in 2020.
Self-Funded Insurance Policy
A self-funded or ‘self-insured’ plan is a type of health plan where the employer assumes the legal and financial risk of paying employee health claims as opposed to purchasing a traditional policy from an insurance carrier. Under a fully-insured plan, employers pay a fixed cost to an insurer. Self-insured health plans are split into fixed costs and variable costs. Approximately 80 percent of total health plan expenses are composed of variable costs and the remaining 20 percent are expenses like Administration and Reinsurance.
How Does This Policy Work?
The cost of health insurance continues to rise, forcing businesses to seek alternative ways to control expenses without negatively impacting employee health. Self-funded insurance is a flexible solution that enables enterprises to customize their health care plan to meet unique business needs.
There are three fundamental aspects of a self-funded insurance policy:
Employer Assumes Financial Risk
Self-funded insurance carries a large amount of risk, as employers are responsible for paying health claims. This can be challenging for smaller businesses with limited resources, but mid-size and larger companies tend to be better positioned for self-funding.
Under a self-funded insurance plan, the business determines the worst-case scenario for claims costs in a given year. The company then pays a fixed monthly cost to a third-party administrator (TPA) for operational services like claims processing. The company also holds reserves for potential claims.
When calculating their maximum risk scenario, businesses should consider reinsurance protection coverage. Also known as stop-loss coverage, reinsurance protects employers against catastrophic claims that exceed the allowable covered expenses under the self-funded plan.
Claims Are Paid Out Of Pocket
Under a traditional health insurance plan, employers are required to pre-pay for potential claims via monthly premiums. Self-funded plans offer more flexibility by allowing employers to pay claims as services are rendered. This arrangement gives businesses more control over their cash flow.
Payments made by employees for health coverage are generally handled through the payroll department. However, instead of the funds being sent directly to the insurance company to cover the cost of premiums, employee contributions are held by the employer to be used as reserves or until claims become due and payable.
Special Trust Funds Are Made To Earmark Money
Self-funded employers will typically set up a special trust fund to earmark money, both corporate and employee contributions, to be used to pay incurred claims. If a claim is lower than predicted, the employer saves money. If a claim exceeds the predetermined level, stop-loss insurance kicks in to put a cap on employee healthcare costs.
A self-funded plan is funded by a pool of assets that is used to administer and pay employee health benefits. Businesses may choose to handle claims processing on their own with funds from a trust or may outsource this task to a TPA. Self-funded are not subject to state laws and state-mandated insurance regulations.
Why Do Employers Choose A Self-Funded Plan?
Employers gravitate towards self-funding insurance for many reasons, with the biggest being savings potential. Self-funded insurance tends to perform better than fully-insured plans, giving employers more control over their spending.
With fully-insured plans, employers pay a monthly premium to an insurer and a percentage of this money goes into a claims fund. At the end of the year, any money left in the claims fund is profit for the insurance company. With self-funded plans, employers pay the exact claim amount and employers get to keep any leftover money in the claims fund at the end of the year.
Plans Are Customizable, Easily Maintainable, And Reserves Flexibility To Choose Providers Or Provider Network
Employers seeking a customizable, maintainable and flexible health insurance plan often turn to self-funded plans. Coverage is customized based on the unique needs of employees and the number of employees that require coverage.
When an employer chooses to outsource the processing and negotiation of claims to a TPA, the process becomes relatively hands-off. Working with a qualified administrator allows employers to focus on core business tasks while still benefiting from the perks of self-funding.
Self-funded insurance also provides the flexibility of choosing providers or a provider network. An employer may choose an administrative service only (ASO) arrangement with a health plan, which allows them to use a provider network with contracted rates. Some businesses may work with a TPA to gain more control of the providers they offer.
Contact Our Self-Funded Insurance Professionals
New City Insurance is dedicated to helping businesses determine what insurance is best for their enterprise and employees. Reach out to the professionals at New City Insurance today to learn more about self-funded insurance and how it works.