As chaos and confusion obfuscate the Affordable Care Act (ACA) and the healthcare landscape in general, it will become increasingly important that employers know all of their health insurance options. One of these options is self-funding (or self-insurance).
Self-funding is a health insurance opportunity that was reserved mostly for large employers, until recent years. This meant only employers with 5,000 or more employees on staff could use self-insurance.
Still, as healthcare has changed dramatically over the past seven years, so has self-insurance. This article will break down what self-insurance is, how it has evolved over time, and its advantages and disadvantages.
What is Self-Insurance?
Self-insurance means an employer operates their own health insurance plan as opposed to purchasing a fully-insured plan from an insurance carrier. In other words, if your health insurance is self-funded you are choosing to pay for individual health claims out of pocket, instead of a monthly fixed premium to a health insurance carrier.
According to the Self-Insurance Institute of America (SIIA), a self-funded employer will:
- Pay for employees’ out-of-pocket claims as they incur
- Set up a trust fund to earmark money to pay incurred claims
- Hire a third-party administrator (TPA) to administer claims
- Purchase stop-loss insurance that kicks in once claims reach a particular dollar threshold, to protect against unpredicted or catastrophic claims
Self-funding can help your company save money, but can also carry significant risk. Essentially, self-insurance boils down to risk versus reward.
How has it changed?
As previously mentioned, self-insurance was typically used only by large organizations with 5,000 or more employees. But, as the ACA was formed and eventually passed, self-funding began to move down market to smaller employers.
In fact, some insurance providers have started to offer a self-funding option for companies with as few as ten employees. Previously, the employee cut-off for many vendors, such as UnitedHealthcare, was 100 employees.
Similarly, the Employee Benefits Research Institute (EBRI) found that the percent of employers using self-insurance rose significantly over the past few years. These percentages increased for both small and large organizations.
Among employers with fewer than 100 employees, self-funding increased from 11.9 percent to 14.2 percent. Self-insurance among employers with 100 to 499 employees, rose from 25.3 percent to 30.1 percent.
Self-funding has increased in popularity for many reasons, which will be discussed in-depth here. Still, two of the biggest reasons for the increase are that these plans are exempt from some of ACA requirement, and they are not subject to state insurance mandates.
Pros
There are numerous potential advantages that a self-insured plan can offer your organization.
1. Personalized Plans
The first advantage that self-insured plans offer your organization is a wider array of policy options. Your company gains the increased flexibility to choose the design of your health insurance plan.
Under a self-funded policy, you decide what the plan will cover including employee eligibility, covered benefits and exclusions, employee cost-sharing, policy limits, and retiree benefits.
No longer does your plan have to conform to a one-size-fits-all policy, as dictated by an insurance carrier. Self-funded plans, as we will discuss later, don’t have to comply to all of the state regulations that fully-funded plans have to.
Also, self-funded plans carry another level of possible customization as they generally require a third-party administrator (TPA) to administer their plan. Third-party administrators vary in level of service and fees. You get to choose your own TPA, each of whom can design a different plan.
2. Improved Data
Operating a self-funded plan gives your organization access to more detailed healthcare data and information. Self-insurance allows you to break down every component of their health care claims and administrative expenses.
You can view all the employee health claims data and demographic information for the year. This data enables your business to hold health care providers accountable for medical costs and outcomes. Improved data also allows your company to build custom-tailored wellness programs, which can help your business decrease risk and lower healthcare costs.
3. Lower Costs for Your Business
The biggest reason that most employers choose to self-fund is that it could potentially save them a significant amount of money. Self-funded insurance policies can save money in several ways.
Self-insurance plans can save your company through lower costs of operation. Administrative expenses through a third-party administrator (TPA) are usually lower than those of a fully-insured program provider.
Also, these TPAs usually have plans set up to control medical costs that insurance carriers may not. Programs such as hospital bill audits, large case management, and PPOs can all help to limit and control medical costs.
On average, your business can expect to save between 4 and 20 percent over five years, by switching to a self-funded health insurance plan.
4. Less Regulatory Burden
According to Inc., the Employee Retirement Income Security Act (ERISA) exempts self-funded policies from state laws. These laws include insurance rules, reserve requirements, mandated benefits, premium taxes, and consumer protection regulations.
Still, some state self-insurance regulations do apply to these plans. In California, for example, self-insurance employers have to have at least 50 employees and carry stop-loss coverage with a minimum deductible of $40,000.
While a majority of state laws don’t apply to self-funded plans, most federal rules still apply. You must still adhere to U.S. tax code and federal anti-discrimination laws. Again, though, some federal rules don’t apply.
Self-funded plans are exempt from portions of the ACA too. Mandates on essential health benefits, community rating on premiums, and the excise tax on health insurance premiums are all not applicable to self-insurance.
5. Lower Premiums for Employees
Self-insurance can also lower the costs for employees, by reducing insurance premiums, according to a 2010 survey by the Kaiser Family Foundation. Workers in firms that are self-funded have lower single and family premiums than workers in firms that are fully insured.
Additionally, workers with family coverage in companies that are partially or completely self-funded pay less out of pocket than fully-insured firms. So, not only is your business saving money, but you get to pass these savings on to your employees as well.
Cons
While there are multiple advantages to self-insured health options, you have to be aware of the potential disadvantages.
1. Provision of Services
Under a self-funded plan, you are responsible for carrying out all of the services that are typically done by an insurance company under a fully-insured plan. Now, as already mentioned, most companies hire a TPA to handle these responsibilities.
Still, doing the research behind selecting a TPA is a sizable responsibility itself. On top of that, you still have monitor your TPA to ensure that they are providing all of the necessary services. Because ultimately, it is your company that is liable for your employees’ healthcare.
2. Increased Risk
Self-insurance, at its core, is about risk versus reward. In theory, a self-funded plan should be more cost-effective than a traditional fully-insured plan. The price you pay for these savings is that your firm assumes the individual risk for high claims.
Also, as previously said, your business is ultimately responsible for the administration of your health insurance plan. Any failure of a self-funded employer to implement an efficient administrative system is a breach of fiduciary duty if you don’t administer the program correctly.
According to Inc., you the employer are legally responsible for managing the policy. Under a self-funded plan, you have to follow strict rules regarding the security of private claims information; which you will now have access to.
3. Cancellation of Stop-Loss Coverage
One of the methods to protect your self-insured plan against a large number of claims in a particular year is the purchase of stop-loss coverage. Stop-loss coverage is a form of insurance that reimburses your business for any claims above a specified dollar level.
These policies protect your company from a giant leap in claims. If one or more of your employees fall victim to a serious illness, stop-loss coverage helps you pay for these increased claims.
Stop loss policies, though; issue on an annual basis without guaranteed renewal. This issue date means that an unexpected jump in health care claims can lead to much higher premiums or cancellation of the policy altogether.
Cancellation of your stop-loss coverage could potentially be catastrophic. If your policy is canceled, and no other reinsurer takes it on, your business could be stuck paying for massive medical bills.
4. Recession/Weak Economic Cycle/ Claim Fluctuation
Like any other investment, there is a chance that outside factors could make a self-funded plan difficult to maintain. These plans require a three to five-year implementation period before your company truly reaps any rewards.
In these times there is an innumerable number of events that could affect your policy. An economic recession or weak cycle could make it difficult to maintain plan funding. Similarly, year-to-year and even month-to-month claim fluctuations can significantly impact your company’s cash flow.
The Wrap
Like almost any decision, the truth about self-insurance lies somewhere in the middle. There are some definite positives and some real negatives to choosing to self-fund your health insurance.
In the end, if your company can withstand the occasional down year and fluctuations in cash flow, you could end up with significant savings. So, it is important that your company not panic if your self-funded plan suffers a year or two of losses. The very next year could bring thousands of dollars in savings for your business.
You better be self-assured, if you’re thinking about going self-insured.