Employers cover health benefits for more than one-third of America’s population (over 157 million people, to be precise). And as many as 67% of these employees have coverage from self-funded plans, up 23% since 1999.
However, many companies still don’t understand how self-funded insurance works.
Whether you are ready for a change in your healthcare plan or preparing to offer employees coverage for the first time, it’s important to understand the overall advantages of self-funding and how to better strategize your company’s health plan transition.
Let’s take a closer look.
Benefits of Self-Funded Insurance
It’s clear that self-funding is a growing trend among employers. But what are the advantages fueling so many businesses to make the switch? We’re breaking it down for you.
- Cuts Costs: Self-funded insurance cuts out unnecessary expenses included in most traditional plans, such as taxes on gross premiums, administrative and underwriting costs. Self-funding doesn’t require you to pay premiums based on community rates that may be higher than your employee group’s risk. In addition, the carrier has less risk which lets them lower their rates.
- Claims Management: Self-funded insurance provides more transparency into your health plan, including various claims, spend and utilization reports. You can manage your claims directly, avoiding the administrative red tape and fees from fully funded carriers.
- Flexibility with Benefits: Self-funded plans offer more control in terms of the benefits you provide to your employees. The plans allow for more customization options that will let you choose features and coverage based on your employees’ needs and your budget, rather than forcing you to select from cookie-cutter options.
- Budget Predictability: A self-funded plan requires a fixed monthly premium that is capped at a predetermined maximum. If your employees make more claims than what you contributed to the plan, stop-loss insurance will cover anything over the capped amount. On the other hand, if your payments into the plan exceed the annual claims, the carrier reimburses you for anything under the capped amount.
While these plans do come with financial threats for the employer, many business owners are finding that the benefits outweigh the risks.
What to Consider When Making the Switch
There are many things to consider as an organization when deciding if self-funded insurance is right for you. Self-insured plans work best for companies that have a strong cash flow or reserves. It’s important to understand what your cash needs are so you have money available to make timely claim payments.
The size of your participant population, the demographic makeup of your workforce and the healthcare market in which you operate all play a role as well. Self-funding should be viewed as a long-term strategy in which good and bad years average out in your favor.
Start by looking at your employee health claims for the past five years and ask yourself the following questions:
- What is the average age of your workforce? Age directly impacts how much you pay for insurance. Older individuals typically have more health conditions and see doctors more frequently, resulting in more claims.
- Were most claims due to chronic illnesses or one-time incidents? Chronic illnesses often lead to a greater frequency of claims which increases your risk of high losses, in comparison to one-time incidents that don’t cause regular claims.
- What was the total dollar amount of claims? (This will help you budget for claims in the future.) If the total dollar amount exceeds your cash flow, self-funded insurance might create budgetary constraints.
- What benefits do your employees really value? Besides including medical, dental and vision care, self-funded plan carriers offer modern benefits like telemedicine, mental healthcare, physical wellness and maternity to better cater to your employees wants and needs.
Evaluating your organization is crucial to help understand your risks before you make the leap to a self-funded plan. Doing so will prepare you for the fundamental factors involved in a transition, ensuring the shift is seamless for both you and your employees.
How to Prepare for the Switch
Switching to self-funded insurance takes on average, two years for preparation and setup. The most important factor in this process is to familiarize yourself with the options you have and create a thorough strategy prior to making the shift. Committing to the transition and having a strategy in place will help reduce the lead time and ensure both you and your organization are prepared. Here’s what to do:
- Create an Action Plan: Outline your timeline and ensure all resources are in place to execute the transition.
- Partner With a Third-Party Administrator: A TPA is the foundation of your self-funded health plan, helping create custom plan designs, determining the network that is offered to members and running the day-to-day operations.
- Finalize Plan Policies and Coverage: Address the multitude of provisions, regulations and taxes applicable to ensure plans are compliant with ERISA, HIPAA and other regulatory mandates to avoid fines.
- Acquire Stop-Loss Policies: Stop loss insurance helps limit the risk exposure for your organization in the event of a high claims year. Partner with a stop-loss carrier to implement specific and aggregate coverage.
- Train Your Team: The administrative burdens of moving from a fully insured contract to a self-insured contract may seem overwhelming to your human resources and benefits team. Having access to information, education and a library of resources to help manage your benefits program will be key to the success of your program.
- Educate Your Employees: Provide your employees with the summary of benefits and coverage and the summary plan description so they can understand what benefits the plan provides and how the plan operates, eliminating uncertainty and employee push-back.
With a strategy in place, you can anticipate challenges that might come up during the transition and be prepared to navigate those challenges with minimal stress.
Rising healthcare costs for employers and employees are driving more companies to move to self-insured arrangements. There is a real opportunity for employers of all sizes to benefit from the market forces that have shaped self-insured plans, but careful planning and evaluation of the financial benefits and risks are critical for success.
If you're looking at switching from a fully insured plan to a self-funded one, working with a TPA can help you determine if it's the right decision for your team, and navigate the transition. Contact IPMG today to learn more about how we can help you understand your insurance options and find the right plan for your business.