Everyone knows that the cost of health insurance is high!
When you consider your group health insurance costs, are you left scratching your head and asking, “What can I do to lower these?”
Beyond shopping around for a different insurance company, there are loads of options available to employers today. Like all insurance agents, we try to help our clients arrive at the lowest premiums possible for their business. And sometimes we do that by switching insurance companies.
But for clients who are open to investigating other options, we offer them a variety of options that they may have never even considered before. One of those options is self-funding their group health insurance program.
For many clients, this, at first, seems like a crazy idea! But, after working with us to understand the ins and outs of self-funding, many of them seriously consider this option for their business. And, over time, some of our clients have saved a lot of money through funding their insurance program this way.
Have you considered self-funding your group health insurance program?
Knowing that this option is not the right choice for every business, in this article I want to help you consider if this is an option you might want to consider.
In the article below, I want to help you understand this underused option in the group health insurance marketplace. I will explore:
- What self-funding is
- How this option works
- The disadvantages and advantages of self-funding
- Why employers hesitate to use this option
- If your business is a good candidate for self-funding
What is Self-Funding?
Self-funding, also known as Administrative Services Only (ASO), is a self-insurance arrangement in which the employer provides health or other related benefits to their employees using their company’s own funding. You might also hear this referred to as “Alternative Funding.” Essentially, when a company is self-funded they act as their own group health insurance provider.
When you self-fund, your company assumes the responsibility of deciding on which benefits to offer your employees, how much you will contribute to medical expenses, and for paying for your employee’s health care claims. In the insurance world, we would say that in this arrangement you, the employer, hold the risk.
This varies from what most companies opt for – being fully-insured. When a company is fully-insured, the employer contracts an insurance company to pay for their employees’ health care claims. In this arrangement, the insurance company holds the risk.
I’ve never heard of self-funding. Is this new?
Self-funding is not new. In fact, this arrangement has been in the market for decades!
Historically, self-funding has been most effective and most utilized by larger corporations with over 1,000 employees.
But this is changing!
In today’s marketplace, over 50% of mid-sized companies with 200-999 employees are self-funding their group health insurance. What’s more, self-insurance is now being offered to employers with smaller companies – sometimes 25 employees or even less!
How Does Self-Funding Work?
If you are considering self-funding, your group health program will have three costs to consider:
- Medical Claims Payment
As the employer, you will need to pay your employees’ medical claims on a very regular basis. Most self-insured programs opt to pay these claims weekly. This ensures that the employer does not get behind in paying these expenses and gives the employer an accurate idea of what their health care costs are.
- Administrative Costs
Operating a self-funded health insurance program requires a lot of planning and know-how. Most employers need outside guidance in processing their claims and administering this program.
Self-funding is a very complicated business and to stay in compliance and avoid legal issues, businesses usually rely on an outside party – a Third-Party Administrator (TPA). Your insurance agent will have a list of TPAs along with the pros and cons of working with each one. Your agent will play a significant role in helping you establish this provider.
- Stop-Loss Insurance Premium
Stop-Loss insurance is an insurance policy that you will need to pay for to protect your company if an employee needs to submit a very large claim – one that would potentially wipe you out financially if you had to pay for it completely. These types of claims are not common, but do occur. A stop-loss policy will cover your costs if a catastrophic claim is submitted.
The cost of a stop-loss policy will vary depending on the type of coverage you apply for as well as the amounts of your limits. Your insurance agent will act as a consultant for you as you put this coverage into place.
Typically when you self-fund your group health insurance, you will have a separate account that you put money into to pay for claims. You might do this yourself, or you might assign this responsibility to a Third-Party Administrator.
When a company begins self-insuring, they will often experience a low amount of claims in the first few months of their insurance year. For example, if your policy year starts on January 1, and your employees have their first doctor’s appointments or procedures in early January, those claims won’t likely be billed until February or even March. This can make it seem like you will end up with a surplus.
The temptation when this happens is to use the money set aside for your self-insurance in some other way – maybe buying equipment or funding a new position. Here is a word of caution: Most often the money set aside for claims will be used as the insurance year rolls on.
At the end of the year, any money left over in your account can be returned to the business, or more likely it will be rolled over for the next year’s claims.
One other note on preparing for claims: You will have the option of paying your claims on a weekly basis, as they come in, or you can pay into the fund the maximum monthly amount of claims which is calculated at the beginning of your plan year.
Paying the monthly maximum is sometimes referred to as “Level Funding” and will look and feel just like a fully-insured plan.
What are the advantages of Self-Funding?
Self-funding can have so many advantages that it is worthwhile for most companies to at least consider this option. Below are seven advantages you will want to consider as you investigate your group health care options.
Reduced overhead costs
When you are fully-insured, your insurance company works their administrative costs into your premiums. The insurance company has to pay personnel to file claims, keep records, work in their service department, etc. These costs are built directly into your policy, so you may not recognize that you are paying them.
Reduced state premium taxes
When you utilize an insurance company for your group health insurance, your plan is subject to state taxes. Self-insured plans are not subject to state taxes.
Avoidance of state-mandated benefits
Self-funded plans are governed by federal law. This means that they are not subject to state mandates regarding benefits.
Because you are funding your own insurance, you determine the benefits that you will cover as well as the levels of coverage you will provide. You also determine how much your employees will contribute to their health care plan.
Data and claims transparency
Because this is your insurance plan, all of your claims documentation is available to you. This means you can see what is causing higher or lower claims, how much prescription drugs are costing, and where you can improve results.
Improved cash flow
Essentially, when you hire an insurance company for your group health insurance, you are pre-paying for your medical claims. When you self-insure, you only pay for claims as they come up. You can especially see improved cash flow in your first year of self-funding.
Choice of administrator
When your group health insurance is provided by an insurance company, the insurance company administers your policy and claims. When you self-insure, you determine who you will administer your policy. You can make sure your administrator handles your claims how you want to have them handled.
What are the disadvantages of Self-funded Insurance?
Self-funding is not the best choice for every business. The following disadvantages may help you determine if this option will work for your company.
Assuming Greater Risk
The primary disadvantage of self-insurance is that you take on more risk. This can be very negative in a year that has large, unexpected medical claims. The unpredictability of this type of plan can also put greater demands on your budgeting and cash flow. Lastly, with this type of plan, you will need to prepare for claims costs fluctuating from year to year.
Self-funding your group health insurance is not a quick fix for any company. This solution is a long-term strategy to help you have the greatest savings over a period of time. You should be forewarned that there will be years with greater expenses. But, in light of the savings you will experience in other years, overall you will save money.
To see the full scope of your company’s savings, you need to commit to self-insuring for at least five years.
Steps You Can Take To Prepare for the Risks
While it is true when you self-fund your group health insurance program your business takes on more risk, there are actions you can take to mitigate those risks.
- Budgeting to reduce risk
When you prepare to self-fund, you will need to budget for maximum exposure. This means you will need your insurance agent to help you determine the maximum amount of costs you might need to pay out in claims throughout the year.
- Acquiring a Stop-Loss policy for extra protection
Your agent will direct you to an established and well-respected Stop Loss Insurance company. Having a policy with a reputable business will ensure you are covered if you have a greater number of claims than you are prepared to pay for. This will protect you from a catastrophic loss.
- Relying on your insurance agent to help you prepare
To have a successful self-funded insurance program, you will need to rely on an insurance agent that has excellent data analysis skills. As your company pays claims, the data that you collect will be used in creating your group health insurance plan.
With the aid of your agent, you will use this data as you determine what benefits you will provide for your employees, how much you will require employees to contribute, and even which health care providers you will partner with. Your agent is a key player in the success of this type of insurance option.
Lack of Administrative Skills
One final disadvantage of self-funding is the required administrative skills to carry out this type of plan. Because you will be processing your employees’ medical claims, you need to have processes in place to make this efficient. Most employers are not able to do this on their own.
What can you do to overcome this obstacle?
- Utilize a Third-Party Administrator (TPA)
To ensure that claims are processed efficiently and effectively, most businesses will need a Third-Party Administer to handle their self-insurance processes. Your agent will help you select a TPA that will best meet the needs of your business.
Third-Party Administrators often provide your employees with electronic means for submitting claims as well as having those claims paid. They also help negotiate with health care providers to give discounts to your employees.
A Third-Party Administrator makes your self-funded health insurance program operate much in the same way it would if you were paying for a fully-insured health insurance program.
- Work with your insurance agent
To make sure the administration of your self-insurance program is properly carried out, your insurance agent will again play a vital role. You need an agent that is well-educated in this type of option as well as one that is highly engaged with their clients. Your agent will need to be heavily invested in your self-funded insurance program for it to succeed.
- Purchase a Stop-Loss Insurance policy
While this policy is put into place to cover your business if one of your employees would have a very large claim, you can also rely upon this coverage if there is a gap in your insurance program that you did not prepare for. Your agent will help you put into place a stop-loss policy to ensure that you are covered in the event of something unforeseen.
Why do some employers hesitate to switch?
Self-funding is a proven way for employers to save money in the long run. Still, some employers are hesitant to switch. Why is that?
Fear is the biggest factor that keeps an employer from making this switch. Most employers are afraid of taking on more risk responsibility – for being responsible for paying their employees’ medical claims.
While self-funding has been around for decades, there is still a lot of misinformation about this option floating around in the marketplace. Many people still have misconceptions about self-funding like you must have over 1,000 employees, that the plan won’t be as good as a fully-funded plan, or that you won’t be able to cover large claims. Most employers have not had an insurance agent sit down with them and help them understand the true risks and advantages of this option.
Another big fear for employers is that one high claim will “wipe me out!” What most employers don’t know is the added protection they can have through a Stop-Loss contract. Discussing this option with your insurance agent can help ease this concern and give you a better understanding of how you can make sure you are fully protected while self-funding.
Is my business a good candidate for a self-funded plan?
Self-funding is not for everyone! Some companies never get comfortable with the idea of self-funding. But if you are considering this option, you will want to ponder this list of questions:
- Do you want to control your claims cost, plan design, and offered benefits? How involved do you want to be in these decisions?
- Are you willing to dedicate time and education to understanding health insurance, a high-cost business expense?
- Do you have an insurance agent with expertise in group health insurance? Is your agent a consultant that understands the ins and outs of self-insurance?
- Self-insurance is a part of a long-range plan regarding benefits. Are you looking for a long-range plan? Does this appeal to you?
- Do you feel comfortable with the risk/reward equation that is inherent in self-funding?
- Is your company in a good cash flow situation? Can you afford the ups and downs of paying out your employees’ claims?
If you can answer “yes” to most of these questions, your business may be a good fit for a self-funded group health care program.
What do I need to know to establish a self-funded plan?
It is critical to engage with an experienced group health insurance agent if you want to move forward with self-funded insurance. Your agent will play a vital role in establishing all the pieces of your group health insurance plan.
Your insurance agent will help you with the following:
- Reducing your concerns about the risk involved with self-funding. Your agent should be able to confidently explain your options and help you arrive at a place where you are comfortable with the risk you are taking.
- Reduce your risk of incurring a large financial pitfall from a costly claim. Your agent will have resources available to you to prepare for a worst-case scenario. Your agent will give you tools to ensure you are still protected.
- Explain stop-loss contracts. These contracts are a necessity for any business that self-funds their group health. Your agent will need to guide you as you apply for the coverages you need.
- Examine plans, benefits, and networks to find those that best suit your needs and your employees’ needs. With a self-funded plan, you are acting as your own group health insurance company. You will have a greater say in what you cover and how you cover it.
- Review the responsibilities of managing the costs of the plan. Your agent will guide you on how to set up the funding for your plan and in what costs you need to prepare for.
- Give you a clear understanding of the role of a Third-Party Administrator. Usually, employers are unable to administer their self-funded plan on their own. They almost always require the services of a TPA. It is your agent’s responsibility to help you discern which TPA will best accommodate your needs and handle the administration of your plan.
I’m interested in a self-funded group health care. What next?
If a self-funded plan is set up and managed correctly, it isn’t terribly risky. And, it is a great option if an employer wants to control their plan and costs. This type of plan has long-term payoffs and benefits for those companies that use them.
But, self-funding is not for every employer!
There are many other options available to businesses today that will help them manage their group health insurance costs.
At Baily Insurance, we are dedicated to helping our clients investigate all of their options. We help them discern which scenario is best for them. By personally investing in our clients, we understand their unique concerns and needs.
Our employee benefits team has a thorough process that they walk their clients through and guide them to the right program for their business. If you are looking for ways to lower your group health costs, you can learn about some of your other options by reading about the factors that affect your group health costs.