For many businesses, health insurance is, after salaries, the most expensive component of employee costs. With the myriad of changes in health insurance including absorbing the cost of the fees and taxes associated with the health care reform law, employers are concerned with how to provide benefit plans that attract and retain employees while balancing the ever increasing cost issue. There has been an erosion of health insurance plans in particular to higher deductible options as one tool used to cut the premium cost. Creative premium financing and health savings accounts is another tactic used. However, there is another vehicle that may help to curb premiums while potentially increasing benefits – self funding.
Self funding health insurance allows employers to gain a greater control of their health care expenses, and lower their company’s insurance costs now and for years to come. Self funding is when an employer directly funds its group/businesses own health insurance claims and therefore only pays for the health care services the company actually uses. If a group’s claims expenses are relatively low, the overall savings can be significant. Furthermore, certain groups begin with much lower premium costs than a comparable fully insured plan based on the health make up of the population. Each group’s maximum self-funding cost for the plan year is determined up front and it’s guaranteed not to change (subject to enrollment and benefit changes) which results in a stable monthly health care payment similar to that of a fully insured plan.
There are three major components to a self funded healthcare plan:
The Health Benefit and Claims Fund
This fund allows an employer to fund its group’s claims. The plan and the fund are owned by the employer and the employer selects the features and options of the plan. The monthly payment for the plan includes a contribution to the claims fund which allows an employer to build the reserves to fund its group’s claims. If there is ever a shortfall in the claims fund (which sometimes may happen early in the plan year) an advance is made from the stop-loss insurance policy to cover any required amount due. This advance is later reimbursed through the claims fund portion of the subsequent monthly payments. If the claims are lower than expected and there is money left in the claims fund at the end of the year, it is refunded to the employer.
Stop Loss Insurance
Stop Loss insurance protects businesses from paying larger than expected claims by making direct payments into the claim fund if claims for a plan year exceed pre-determined levels. There are two types of stop loss insurance – the aggregate and the specific. The aggregate stop-loss benefit protects an employer against higher-than-expected claims incurred by the group as a whole. This policy is based on the total expected claims for the plan year for all group members. If the group’s overall claims for the plan year exceed the aggregate limit, the stop loss insurance pays the cost of the group’s claims for the remainder of the plan year. The specific stop-loss benefit protects against higher-than-expected claims by an individual group member. If an individual group member’s claims exceed a preselected level called the specific limit, the stop-loss insurance pays for the remaining portion of that member’s claims for the plan year. It is possible to still receive a refund for the plan year even if the specific limit stop loss insurance is triggered if the total claims are still below the aggregate limit. Both of these insurance policies are funded by a portion of the employer’s monthly payment.
Self funded health insurance plans are managed by a Third Party Administrator (TPA). The TPA manages the claims payments, accounting and customer service. All of the plan administration is handled by the TPA so there is no added administrative burden with a self funded plan. The predetermined flat monthly payment that is taken by the TPA each month includes the contributions for the claims fund, the stop loss insurance and the administrative services. TPA’s can be stand alone entities or components of health insurance companies.
Self funding can be done at an individual group / business basis, or can be structured as part of a larger buying opportunity where multiple, like industry or profession businesses can structure a collaborative self funded structure. The size of the business can determine the appropriateness of self funding. In the past, self funding would not be considered advantageous for businesses fewer than 100 enrollees in size. However, there has been a proliferation of products and structures from insurance carriers working with consultative insurance brokers to bring the concept of self funding to businesses much smaller in size. Keep in mind that even though self funding may make sense conceptually size wise, there are a host of other factors such as risk tolerance, health assessment of the business, plan structure among others that need to be factored into a self funded analysis.
With a growing number of players, the possibility of short and long-term premium savings and benefit creativity, the self funding option is one to be at the least, investigated for your employee benefit program. Looking for more information on self funding? Contact us using the form below and a member of our team will be in touch shortly.
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