Rising health care costs are putting the squeeze on employers. According to SHRM, large employers will pay about $10,850 for each covered employee in 2021, while employees will pay about $4,650 each. This is an increase of about 5.3 percent from 2020, when large employers paid about $10,340 per covered employee and employees paid about $4,430 each.
Employers are dealing with rising costs, expensive prescription drugs and uncertainties stemming from the pandemic and the issue of delayed care. They’re looking for new ways to get a handle on health care costs. For some employers, self-funded health plans may provide the control they need.
Self-Funded Health Plans vs. Fully-Insured Health Plans
In a traditional or fully-insured health plan, the insurance carrier pays the claims, and the employer pays a monthly insurance premium to the insurance carrier to purchase coverage in a group health plan.
In a self-funded health plan, sometimes called self-insurance, the employer pays the claims. Essentially, the employer is insuring itself, hence the term “self-funded.” Instead of paying a monthly insurance premium for health benefits, the employer sets aside money for the expected health care costs of its employees.
The laws regulating self-funded plans are different, too. Under the Employee Retirement Income Security Act of 1974 (ERISA), private-employer self-funded health plans are exempt from most state insurance regulations.
The Benefits of a Self-Funded Health Plan
A self-funded health plan may not be right for every company, but self-funding can provide some definite advantages for some companies. The main advantage of self-funding is that it gives employers greater control over their employee health plans.
The self-funding model gives employers greater control over the employee benefits themselves. This may allow employers to develop plans that meet the needs of the workers.
The self-funding model also gives employers greater control over costs. Many employers talk about needing to keep health care costs down. The self-funded health insurance model gives them an incentive to make that happen, and it rewards them for doing so.
In a traditional, fully-insured group health plan, the employer must pay the premiums no matter what. With a self-funded plan, the employer pays claims instead of a premium. By being proactive about keeping costs down, the employer may be able to save money using the self-insurance model. The employer may be able to achieve savings both by reducing the claims costs and by reducing the claims volume through the use of wellness programs, pharmacy benefit managers and other proactive cost management measures.
Using self-funded health plans may also improve a company’s cash flow. If the amount of money spent on claims is less than the amount of money that the self-funded employer set aside for claims, that money can be reclaimed and used how the employer sees fit.
The Drawbacks of a Self-Funded Health Plan
There are also downsides to the self-funded health plan model. For one thing, this model can require a significant amount of administrative work. An insurance company or third-party administrator (TPA) can assist with the management of payments and other administrative issues, but the employer will need to be prepared for this aspect of the self-funded model.
Second, there is some risk involved. The employer is responsible for paying claims, and this means that the employer may be hit with claims that are much larger than anticipated. For smaller employers especially, a single massive claim can completely throw off the projected losses.
Although this risk must be considered, it should not necessarily scare employers away from self-funded health plans. Employers using the self-funded health plan model typically use stop-loss insurance to protect themselves from this risk.
Stop-Loss Coverage for Self-Funded Health Plans
Health care costs can be outrageous. If a beneficiary requires multiple surgeries, long hospital stays or other expensive treatments, the associated costs may exceed the employer’s funds.
Stop-loss insurance provides a solution to this potential problem. Stop-loss insurance is essentially a type of excess insurance. Employers that use the self-funded health insurance model can enroll in stop-loss insurance in case there are any catastrophic claims.
This means that the self-insured employer will pay most claims, including the average claims that are expected to occur, while the stop-loss insurer will pay the catastrophic claims, if such claims arise.
Self-Funded Health vs. the Captive Model
The captive model of insurance sounds similar to self-insurance, but it works a little differently. In the self-funded insurance model, the employer sets aside a fund to cover claims. In the captive insurance model, the employer creates an insurance company to provide coverage.
Also, in the self-funded health plan model, the employer only deals with its own claims. In the captive insurance model, an employer may form or join a captive with other employers. As with the self-funded model, the captive model is often valued because it gives employers control over their health care costs and benefits. Employers may also form or join a medical stop-loss insurance coverage to insure catastrophic claims in the self-insured health plan model.
Should your company use a self-funded health plan?
As health care costs continue to increase, the self-funded health plan model is becoming an increasingly attractive alternative to traditional, fully-insured group health plans. However, health insurance is not one-size-fits-all. Switching to a self-funded plan is a major undertaking, and employers should consider the advantages and disadvantages carefully before making the decision.
Here are some questions to consider:
- How many beneficiaries does the employer need to insure? The size of the employer can impact whether a self-funded plan is a good fit.
- How active is the employer in controlling health care costs? Self-funding can be a good option for employers that are able to implement cost-saving strategies.
- Is the employer satisfied with the group health plan options available? Self-funding can be an attractive alternative for employers that are not satisfied with the costs and options in the group health plans available to them.
- How much risk is the employer willing to take on? A self-funded plan can involve more risk than a fully-funded group health plan. However, stop-loss insurance coverage can help self-funded employers manage this risk.
There are regulatory and practical issues to consider before adopting a self-funded insurance model. If you would like to explore self-funding options for your company’s health plan, contact our employee benefits team.
