While self-funded insurance plans have historically been an attractive option for large businesses, now they are growing in popularity with small-to-mid-sized companies.
While these plans do come with financial risks for the employer, many business owners are finding that the benefits outweigh their risks.
So, what are self-funded plans, and why are companies switching to them? We're breaking it down for you.
How Self-Funded Insurance Works
Self-funded insurance, also known as self-insurance, is an insurance plan where employers cover out-of-pocket claims and expenses for their employees. To do this, an employer will typically work with a third-party administrator (TPA) to develop a plan that they believe will meet the needs of their employees.
Through their TPA, the employer contributes a predetermined monthly fee set aside to cover expenses such as administrative fees and the anticipated medical claims of its employees. In addition, many small-to-mid-size companies invest in stop-loss insurance to help mitigate risk if an employee has a large unexpected medical claim. Throughout the year, as employees have medical claims, they would be paid from this fund.
There is the possibility that the monthly costs may exceed the predetermined investment, and the employer will owe additional money on a given month. But at the end of the year, if the company had set aside more than they've spent on claims, the employer will receive that remaining money back (except for a percentage for insurance companies to cover administrative costs.)
The Benefits of Self-Funded Insurance
While self-funded insurance can come with these added financial risks, it also offers a wide range of added benefits. Compared to fully-insured plans, self-funded insurance plans provide:
- Added flexibility to customize the benefits plan
- Cost-savings opportunities by only paying for what is used
- Medical coverage that is not subject to state medical premium taxes
- Financial protection on overages (if stop-loss insurance is used)
- Potential to receive money back
These benefits make self-funded insurance an attractive option for companies with the cash flow available to cover unexpected health claims. Though the companies with this cash flow are typically mid-to-large size companies, many small businesses with as few as 25 employees are opting to move to a self-funded plan.
Self-Funded Insurance vs. Fully-Insured Insurance
Whereas self-funded insurance plans offer a flexible way to set aside money for your employees' health claims, fully-funded insurance plans provide a lower-risk way to pay for healthcare coverage. Instead of setting aside money to use when needed, fully-insured plans require employers to contribute to a large pool by paying a monthly insurance premium. The insurance provider then assumes all financial risk.
No matter how much money employees spend toward health benefits throughout the year, the employer is locked into paying their monthly premium. This means if employees spend $50,000 more than predicted on claims throughout the year, your company does not owe anything additional at the end of the year. Additionally, if employees spent $50,000 less than predicted on claims, your company would not receive any money back.
Should You Switch to Self-Funded Insurance
When deciding if self-funded insurance is right for your business, there are a few things to think about. Consider your employees' needs, your anticipated cash flow and the level of control you want in creating your business' insurance plan.
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 that transition. Contact IPMG today to learn more about how we can help you navigate your insurance options and find the right plan for your business.