Insurance 101

Self-Fund Health Insurance Plans Can Cut Costs

Dee McFarland is president of the Western Reserve Association of Health Underwriters. She is a benefits consultant with AssuredPartners in Boardman.

One effective way to combat increasing health care costs is to move to a self-funded insurance plan. This allows employers to take control of their benefits plan. If implemented correctly, companies can offer better benefits for lower cost.

Even though these plans are called self-funded plans, an employer typically does not assume 100% of the risk for catastrophic claims. Rather, the employer buys stop-loss or excess-loss insurance to reimburse the employer for claims that exceed a predetermined level. This coverage can be purchased to cover catastrophic claims on one member (specific coverage) or to cover claims that significantly exceed the expected level for the entire group (aggregate coverage).

Here are the basics:

  • When the employer assumes the financial risk for providing health care benefits to its employees, this is called self-funding. Under this model, the employer/plan sponsor will assume the risk of the health plan instead of the insurance carrier.
  • Self-funded plans allow the employer to tailor the plan. Employers can look at demographics of their workforce and decide which benefits would be most utilized and cut benefits likely to be underutilized.
  • While previously used by large companies, small and mid-sized companies – even with as few as 25 employees – are seeing cost benefits to moving to self-funded plans.
  • Companies pay no state premium taxes on self-funded expenditures. This savings is about 3% to 5%.
  • Since employers are paying for claims, they have one of the biggest advantages of self-funding: access to claims data. While keeping within HIPAA privacy guidelines, the employer can identify certain at-risk conditions (diabetes, heart disease, stroke) and offer assistance in managing these health concerns
  • Companies typically hire third-party administrators to help design and administer the insurance plans. This allows greater control of the plan benefits and claims payments.
  • Companies will also contract with pharmacy benefit managers, medical utilization providers and a stop-loss insurance carrier to cover catastrophic claims.
  • Much of administration and compliance functions fall on the employer. However, these added responsibilities are typically managed with the help of a third-party administrator. Self-funded plans are subject to the Employee Retirement Income Security Act, which requires each benefit transaction follow the coverage provisions outlined in the plan document. HIPAA privacy, security and portability provisions apply.

While self-funding is a great tool to lower costs, it is not for everyone. Making the switch requires careful consideration and in-depth analysis. Things to consider are your company’s risk tolerance, ability to manage private health information and your capacity for managing contract options with multiple vendors. Another important consideration is the amount of time you are willing to invest. Self-funding is a three-to-five-year investment at minimum to truly experience a return on investment.

As you can see, self-funding has many facets. It’s important to gather as much information as you can and weigh the benefits and risks of moving from a fully-funded plan for your company to a self-funded model.

Published by The Business Journal, Youngstown, Ohio.