The Insider Perspective on Fully-Insured Plans vs. Self-Insured Plans

Discover the Truth About the Alternative Funding Mechanisms Available to Employers Today

According to the U.S. Centers for Medicare and Medicaid Services, the U.S. spends approximately $4.1 trillion a year on healthcare or nearly $13,000 per person. It’s no surprise that more and more, employers are considering a change in their medical insurance funding arrangement. Yet, for the most part, employers believe there are simply two options: fully-insured or self-insured.

Due to elements within the Affordable Care Act (ACA) around regulations and tax advantages, there is now a multitude of different options that shift risk along the spectrum from fully-insured to self-insured. There are just as many names of these solutions, but in general, anything other than traditional fully-insured arrangements can be characterized as some sort of “alternative-funding” strategy.

Most employers with more than 200 employees tend to shift toward self-insurance. Many do this because they think it’s simply what you do when you become big enough. However, the reason to shift one’s funding arrangement has to do with how to manage volatility and long-term risk within a population’s risk pool. Reaching about 200 or 250 employees was the historic tipping point for when an employer’s claims became predictable enough to forecast future volatility to within a manageable range of risk (with proper reinsurance levels in place). This was simply due to the “Law of Large Numbers” stating; the larger the population, the less one anomaly could adversely affect the expected outcome.

One Size Doesn’t Fit All

Because a portion of one’s self-insured costs is paid toward reinsurance, there are ways to protect against this volatility. And with the advent of lower and lower reinsurance options, the magic tipping point has dropped significantly. Now we see self-insured plans for employers as small as 25 employees in some cases. That said, their reinsurance level is very conservative (and thus very costly), so their odds of saving compared to a fully-insured alternative are low. Risk and reward; the more risk an employer takes on, the higher the reward can be in potential savings.

The ideal situation is a funding arrangement that maximizes the potential return and minimizes the potential risk. The right benefits strategist can work with you to determine the model that makes the most sense for your organization, from a cost savings perspective without sacrificing the benefits your employees’ value. This takes the guesswork and gut decision making out of the process and allows customers to determine if an alternative funding concept is right for them, and at what level they should layer in protections.

Taking a Long-Term Approach

If done correctly, moving towards self-insurance will produce a long-term financial win for an employer. This is a multi-year decision, typically requiring at least a five-year commitment to be truly successful. It’s crucial to have a partner with you along the way to make the transition, and ongoing management of the plan, a win. Once the transition has been made, our jobs as benefits consultants become even more interesting. We can begin to work with clients much more directly on cost-management efforts, employee wellbeing initiatives, customizing benefit plans to meet the unique needs of a dynamic population, reviewing prescription drug contracts and rebates to favor our clients and employees, and even contracting directly with specific doctors and medical groups based on specific clinical strategies.

We’re able to expand our holistic view of our clients’ population base into something more than just health insurance. We can more effectively connect the dots between the broader employer strategy and their benefits strategy. The result is a more engaged and happier employee with lower employee turnover.

This is all to say that self-funding your health plan is not to be done in a vacuum. We take a broad and long-term view of this as part of a larger plan, and the shift in funding is an execution of a specific tactical step along the path. It can be the difference between just a functional health insurance plan and a truly successful employee engagement strategy.

Discover the funding arrangement that is best suited for your organization by learning more about alternative cost solutions by visiting OneDigital’s Lower Cost blog.