Employers who want to gain more control over their cash flow may consider switching from fully-funded health insurance to a self funded insurance plans. Also referred to as a self-insured plan, self-funding is when an employer assumes the financial risk of providing healthcare benefits.
What Is a Self-Funded Insurance Plan?
Larger companies often seek out self-funded health insurance plans as a way to save money and achieve a custom plan that aligns with employee needs and business goals. Under a self-funded plan, the employer maintains control of overall health plan reserves, allowing for the maximization of interest income.
Self-funded insurance can also deliver other key benefits to employers. For example, self-insured employers are not subject to certain state benefit mandates and health insurance regulations. Self-funded employers can also contract with a provider network that is best suited to meet the needs of their employees.
How Does Self-Funding Insurance Work?
Self-funded health insurance plans differ from traditional fully-funded plans as employers run their health plan instead of purchasing a plan from an insurance carrier. Self-insuring exposes a business to greater risk in exchange for significant savings on premiums.
Under a self-funded insurance plan, the employer calculates all fixed and variable costs for the plan. Fixed costs generally include administrative fees, stop-loss insurance premiums and expenses from services like third-party administrators (TPAs). Variable costs include the payment of employee health care claims. These expenses vary each month based on the health care services used by covered employees.
The biggest risk associated with self-funding is the possibility that claims may surpass the amount calculated by an employer. To limit this risk, self-insured employers generally purchase stop-loss or excess-loss insurance. This coverage covers catastrophic claims if a health claim exceeds a predetermined level.
How Does It Differ from Traditional Insurance?
Fully-funded health insurance is a traditional type of employer-sponsored health insurance in which a business pays a premium to an insurance carrier. Under a fully-funded plan, premium rates are fixed on an annual basis and the amount paid is based on the number of employees enrolled each month. Each month, the insurance carrier collects premiums and uses these funds to pay for healthcare claims. Employees and other covered persons, such as dependents, are responsible for paying any copayments or deductibles charged under the policy.
Why Should Employers Consider a Self-Funded Insurance Plan?
Many benefits come from switching from a fully-funded health insurance plan to a self-insured plan. Some of these benefits include:
Cost Savings from Benefit Design Changes
Self-funded health plans tend to be more flexible than traditional fully-funded insurance. This flexibility allows employers to make strategic benefit design changes that can lead to significant cost savings over time. Under a self-funded insurance structure, all claims are paid directly from a pool of money explicitly used for claims payments. At the end of the year, any amount of money leftover may be returned back to the business.
Increased Flexibility and Control of Plan
The increased flexibility of a self-funded health plan can lead to countless advantages for businesses and their employees. Employers can customize a health plan based on employee feedback and goals, as well as the employee population. Employees who gain access to health insurance coverage that meets their unique needs often experience a greater quality of life, which can improve productivity and motivation in the workplace. Businesses also have greater control over choosing, monitoring and coordinating plan vendors.
Enhanced Flow of Cash
Self-funding can have a positive impact on a business’s cash flow. This occurs when money that was formerly held by the insurance carrier in the form of reserves is then held by the employer in a special trust. This money that is held for pending or unreported claims is freed for use by the employer. If the claims incurred during the year are lower than anticipated, the business keeps the savings. This differs from a traditional fully-funded plan in which the insurance carrier keeps the savings if claims never materialize.
Cost Savings from Reduced Premiums
Employers who choose to self-fund employee health insurance can benefit from significant cost savings due to reduced premiums. Self-funded employers are not responsible for paying full state premiums taxes. Under a self-funded plan, premiums are only collected with stop-loss coverage, resulting in a greatly reduced premium. Employers can also avoid other expenses, such as fees charged by insurance companies for risk and retention.
Talk with New City About a Self-Funded Insurance Plan
Self-funded health insurance is not the right solution for every business but can be highly advantageous for certain companies that want greater control over their finances and benefits plans. To learn more about why an employer should consider self-funded insurance or to speak with an insurance professional about setting up a self-funded plan, reach out to the insurance professionals at New City Insurance.