A self-funded group health plan is one in which the employer eliminates obligations to a health plan provider by assuming the financial risk for providing health care benefits directly to its employees. In this arrangement the employer has the most control and greatest access to data. However, your organization needs to open to taking on more risk and have positive cash flow in order to pay for the claims as they come in.
5 Benefits of self-funding
Self-funded plans have more control over what benefits are offered and what services are covered.
Self-funding allows for greater access to claims data, which provides employers a more comprehensive picture of their covered population.
Payment for coverage does not occur at the beginning of the term, allowing the organization to retain the cash until a claim occurs.
Self-funded plans are exempt from state insurance regulations due to provisions in the ERISA laws.
If actual claim costs are less than expected the organization retains the savings, not the insurance carrier. With the proper claims management systems in place, the potential of annual plan savings is about 3-5%.
5 Cons to self-funding
In a self-funded plan, the organization now assumes much of the financial risk previously held by the insurance carrier. One specific area of risk is if your organization has relatively few employees to spread the risk between, thus leaving yourself more susceptible to a high cost claim. There are protections you can put in place to assist you in these types of situations, but they do not completely insulate the organization from the risk.
There is no way of predicting when one or more high cost claim may come in necessitating greater cash disbursements. The organization should prepare itself for these “rainy day” scenarios.
In order to administer a plan properly, your organization would need a third-party administrator (TPA) to assist with the plan. TPA’s help to coordinate all the moving parts of a self-funded plan, but there is a cost for their services.
The employer is ultimately responsible for the operation of the plan and must follow the myriad of strict rules protecting individual’s health information.
Self-funding is a long-term strategy. Not every year is going to be a good year and your organization must recognize the long term benefits of the self-funded plan during these down years. It may very well take several years before the organization sees a return on its investment.
Self-funding definitely is not for everyone. For many, the benefits do not outweigh the cons. The good news is that if you are not ready to take the leap to self-funding, there are new products that carriers are offering to dip your toe in the self-funding waters without taking on all the additional risk. Level Funded or Level premium products are a self-funded hybrid and are growing in popularity. The benefit to moving to this type of arrangement is the transparency, predictable monthly costs and share in potential surplus. For many, this option is more appealing because you can gain insight but do not have to take on all of the additional administrative burden and financial risk.
A few key questions to consider when thinking about self-funding or alternative funding:
- What are the organization’s goals? Immediate cost savings, turnkey administration, long term cost control?
- What is the strategy behind the approach being considered? Independence, cooperative purchasing power, risk sharing?
- What are the intricacies involved with the funding solution?
- Variability in monthly payments, protection for catastrophic claims, fiduciary responsibilities, applicable state mandates?
Captive
A Captive program is a Self-Funded plan with the protection of other similar or non-similar companies that buy-in to the Captive together. A captive is an independent insurance company created and owned by at least one non-insurance company that assumes the employee benefit risks. Participating in a Captive allows members to benefits from partially owning an insurance company. In this arrangement, plan designs are completely customizable and employers have freedom of choice for Network and Pharmacy Benefit Manager. There is a possibility that fixed costs may be more expensive. However, potential to receive 100% of surplus along with dividends is attractive. Employers might choose to form a captive as an alternative to traditional insurance in order to better control costs and manage the risks associated with providing employee benefits.
Consortium
A consortium program is a Self-Funded plan with the protection of Stop Loss Purchasing power. Employers will have the protection to be rated along with hundreds of other companies under the same Stop Loss carrier and therefore receive Stop Loss discounted rates. This benefits program gives middle market employers (50-1000 employees) collective purchasing power that drives down costs and spreads risk, allowing them to design a long-term cost-effective benefits plan that’s self funded with limited risk.
Level-Funded
There is a rise in popularity in Level-funding plans within in the 51-99 market segment. Level-funded arrangements enable employers to benefit from the regular and predictable cost of a fully insured plan with the flexibility of a Self-insured plan and without the uncertainty of fluctuating claims costs. These plans are emerging as a great compromise between fully and self-insured plans as a way to minimize risk with cost predictability. Level-Funding provides all the same advantages of self-insurance, including greater flexibility than a fully insured plan, so employers can tailor plans to their specific health care needs. Unlike fully-insured plans within the 51-99 market segment, Level-Funded plans allow employers to gain reporting on claims utilization that otherwise is not provided by the carriers within this market segment.
Reference Based Pricing
Reference Based Pricing (RBP) is a cost containment strategy that allows employers to set a pricing cap on what they will pay for certain medical services. Compared to traditional funding arrangements, this model can result in total claims savings between 15-30% depending on your area. Employers are able to save significantly on claims because they are essentially telling the healthcare system that they will not pay more than what the Medicare price dictates for certain services.
