The other day I was talking with a business owner with 50 employees about his health insurance, and I asked if he had ever self-funded.
His reply: “Oh, we’re too small to self-fund.”
I hear this often from smaller employers–and while it’s true that most self-funded health plans have over 200 employees, that doesn’t mean there aren’t interesting and valuable self-funded options for smaller groups as well. Self-funding gives a group as small as 25 covered employees the opportunity to see and understand where their health dollars are going and potentially take some control over this significant investment.
What is self-funding?
In a nutshell, self-funding one’s health plan, as the name suggests, involves paying the health claims of the employees as they occur. By contrast, with a fully-insured health plan, the employer pays a certain amount each month (the premium) to the health insurance company, and in return, the insurance company covers the costs of the employees’ healthcare. With a fully-insured plan, there is no additional risk to the employer: they know exactly what their plan is going to cost each year. The downside, of course, is that if the employees are healthy and don’t use much health care, the employer has spent a significant sum and doesn’t get any of that money back.
With self-funding, the opposite occurs: the healthier the employees are, the lower the plan costs will be. Typically, the employer selects a Third-Party Administrator (TPA) to administer the health plan (I have yet to meet an employer who wants to receive doctor’s bills on behalf of their employees). The TPA processes claims as they arrive from the doctor, hospital or pharmacy. They pay the claims by accessing a bank account set up by the employer for this purpose.
In addition to the administration, an employer will want to purchase stop-loss coverage, to protect themselves against large claims. The obvious risk in self-funding is a situation of large claims. Cancer treatments can easily cost over $200,000 in the first year and often continue in the six-figure per year range for years after diagnosis. I regularly see claims for serious illnesses that exceed half a million dollars a year for one individual’s care. For a small employer, such an expense is potentially devastating – which is where stop-loss comes in.
What is stop-loss?
I always recommend small employers purchase two types of stop-loss: individual or specific stop-loss, which provides coverage for each individual on the plan, and aggregate stop-loss, which covers the total annual cost of the health plan. With individual stop-loss, an amount is set above which the insurance company will cover 100% of the member’s covered claims for the year. The individual stop-loss amount might be $30,000, which means that the employer is responsible for the first $30,000 of health care for each individual covered on the plan. Anything above $30,000 is paid in full by the insurance company.
Aggregate stop-loss provides an upper limit for the overall plan costs. This gives the employer the security of knowing there is an upper limit in terms of annual cost that the plan will not exceed.
Weighing the Pros and Cons
The biggest advantage of self-funding is the potential for cost savings. As I mentioned earlier, if employees are relatively healthy and don’t use the health plan very much, the employer’s costs will be lower than if the plan were fully insured. By self-funding, you also avoid paying premium tax and contributing to the insurance company’s profit margin. Self-funding gives you an almost infinite number of creative possibilities for managing the plan’s health care costs, which are not available in a fully-insured, bundled arrangement.
So why wouldn’t an employer self-fund? There are some employers for whom a fully-insured plan is still the best way to go. Employers without the time or resources to devote to a more hands-on, complex plan should probably stay with a simpler plan like a fully insured plan. Self-funding has a number of compliance requirements that are not always present for a fully-insured plan, such as non-discrimination requirements and 5500 tax filings. Furthermore, an employer without a stable cash flow may feel the potential cost fluctuations from month to month of self-funding put too much strain on their company’s finances.
There is no one-size-fits-all for group health plans. The important thing is not to rule out any option before discovering if it could be a good fit for your firm.
Explore the different funding arrangements and make the best choice for your company based on your finances and resources. I have seen self-funding save employers money many times…but at times it is not the right choice for an employer, and for those employers, a fully insured plan provides the stability and simplicity they need.
Assess the plan that’s best suited for your company by contacting your OneDigital Consultant today. If you’d like to find out more about alternative funding plans, check out the article: The Insider Perspective on Fully-Insured Plans vs. Self-Insured Plans.