Everyone should have health insurance, but there is no getting around the fact that health insurance costs businesses and employees a lot of money. Just like any other line-item in your budget, you would obviously prefer to pay less rather than more for health insurance without sacrificing quality. Thankfully, there are indeed various methods to achieve this desired outcome. For instance, perhaps you have heard of other companies choosing to self-fund their health insurance. But what exactly does that mean? And would self-funding be a good fit for your company? These are big questions, but I attempt to provide a brief overview of health insurance self-funding in this article.
Under a fully-insured health plan, your business pays a monthly premium to a health insurance company (e.g., Aetna, Blue Cross Blue Shield, Cigna, FirstCarolinaCare, and UnitedHealthcare). In exchange for that monthly premium, the health insurance company agrees to cover the healthcare costs that your employees incur. One of the advantages of this type of health plan is that you know exactly what your plan costs are going to be each year because you can simply multiple your monthly premium payment by twelve. However, one potential disadvantage to a fully-insured health plan is that even if you and your employees are very healthy and/or do not incur a lot of healthcare costs, the health insurance company will not, generally speaking, pay you back for saving them money.
A self-funded health insurance plan, on the other hand, attempts to resolve this dilemma in your favor in exchange for you taking on controllable and customizable risks. On a basic level, self-funding your business’s health insurance plan means that your business, rather than the health insurance company, directly pays for the healthcare costs that your employees incur. Your employees still go to the same doctors and hospitals, but as explained further below, self-funding offers much more flexibility to meet your company’s specific health care needs, which, in turn, allows you to better manage your health care costs.
Broadly speaking, with a self-funded health insurance plan, you set aside a specific amount for administrative fees, stop-loss insurance, and for the medical bills you anticipate each month from your employees. There are some risks and additional work associated with these items, but there are effective ways to control for each one.
As an example: Just because you go self-funded does not mean that you now must receive your employees’ medical bills and write checks to all their doctors and hospitals. Almost always, companies who go self-funded simply hire a Third-Party Administrator (“TPA”) to administer their health plan on behalf of their business. A TPA can be one of the insurance companies themselves as well as companies like Sedgwick Claims Mgt., Gallagher Bassett Services, and CorVel Corp., among others.
The TPA you select will receive the claims submitted by your employees and pay the medical providers from a bank account that you establish for this purpose. Also, by using the reports and data you receive from the TPA, you can regularly review and evaluate how and where your healthcare costs are going. Additionally, TPAs manage your health plan based on your own preferred specifications instead of the insurance company’s internal policies.
In addition to the TPA, if you elect to be self-funded, you need to strongly consider purchasing stop-loss coverage to protect your company against large, unexpected claims. Especially for a small employer, even one unexpected claim for a huge medical bill could be devastating. But you can mitigate this risk with proper stop-loss coverage.
The basic principle of stop-loss coverage is that your company will only be responsible for employee medical bills up to a previously agreed upon threshold (for instance, $25,000, $50,000, etc.). Once a medical claim hits that threshold, the stop-loss coverage provider would be legally responsible for all subsequent payments related to that claim. This kind of stop-loss coverage is known as individual or specific. You should likely also purchase “aggregate stop-loss coverage,” because it places a previously agreed upon threshold on your overall annual medical costs for all employees so you can have peace of mind that you will never exceed that total amount in a given year. Again, this piece, like all pieces in the self-funded health insurance world, is highly customizable and can be tailored to your specific needs.
Despite the obvious risk of the unknown, these customizations mean you can potentially save big dollars with a healthy employee population, by avoiding paying premium tax, and by providing your employees with the care they actually need and use. Simply put, self-funding can be set up in countless creative ways to maximize the benefit to your business while simultaneously minimizing risk if done properly. Fully-insured health plans, while convenient and less risky, cannot match this potential.
The data shows that larger companies (i.e., 200+ employees) are more likely to utilize self-funded health insurance plans, but that does not mean that self-funding is unavailable for smaller groups. These days, companies of all sizes are working together with their brokers, insurance companies, and TPAs to figure out if self-funding can be an effective way to provide for their employees’ health care needs. Self-funding can even be a good fit for groups of 25 to 50 covered employees depending on a number of factors that you should discuss with your health insurance broker.
Though there are a lot of potential upshots to self-funding, it is absolutely not for every business. Even with the assistance of a TPA, self-funding will likely require you to be more involved with managing your company’s healthcare needs than you previously have been. Furthermore, even with stop-loss coverage, if potential monthly cost fluctuations would be burdensome to your company’s finances, it also might not be a good fit for your business.
Though we would all like there to be a sure-fire way to guarantee lower healthcare costs, there simply is not a proverbial “magic bullet.” Circumstances and strategies vary depending on your company, employees, and numerous other factors. But self-funded health insurance could potentially be an important consideration for your overall strategy to control costs at your business. As always, I recommend that you speak with an experienced professional benefits consultant to find out whether a self-funded health insurance plan might (or might not) work for your business.
The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any subject matter
Dane Scalise is an experienced insurance and legal advisor, advocate, and consultant. As General Counsel and Insurance Broker for GriffinEstep Benefit Group, he helps people and businesses find creative and intelligent insurance solutions. Established in 1998, GriffinEstep is a leading independent, full-service insurance brokerage company with a team of consultants dedicated to clients, not insurance companies. GriffinEstep provides a unique combination of national expertise and local presence along with the knowledge, insight, and technology necessary to customize the individual insurance needs of its valued clients.
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