Understanding Self-Funded Insurance for the Midsize Employer

Self-funded business insurance has surpassed traditional insurance policies. Around 65% of businesses today are choosing self-funded insurance over traditional insurance options, and that number doesn’t look like it’s dropping any time soon.

With so many businesses today choosing to ditch traditional health plans for self-funded health plans, it makes sense to wonder whether it makes sense for your midsize business.

In this comprehensive guide, we’ll discuss everything you need to know about self-funded insurance for the midsize employer, including when you should consider it for your company, and whether it’s a good fit for you.

What Is Self-Funded Insurance?

Self-funded insurance is a type of health insurance program where an employer assumes the risk and cost of providing healthcare coverage for their employees. Rather than paying a fixed premium to an insurance carrier, the employer pays for actual healthcare claims out of pocket as they are incurred. Essentially, you only pay for the medical services that you use.

How Does Self-Funded Insurance Work?

For a self-funded plan to work, employers must set aside enough funds to pay for their employees’ healthcare claims. A good starting point is to create a comprehensive budget that ensures the company can financially cover the potential liability of the employee claims up to the determined stop loss limits.

Further, since there is no longer a fully insured carrier handling the plan administration, most self-funded plan sponsors engage a Third Party Administrator (TPA) to handle tasks such as claim processing, disease management, prior authorizations, compliance issues, and provider network integration..

What’s the Difference Between Fully Insured and Self-Funded Insurance?

Fully insured programs are the “traditional” type of insurance many of us are familiar with. With fully insured plans an employer pays a fixed premium rate to an insurance company.  In exchange, the insurance carrier assumes the risk and manages claims. The employer’s monthly premium is set at the beginning of the plan year and will remain stable for 12 months regardless of claim utilization.

With self-funded plans, the employer pays various fixed costs to the TPA that administers the plan.  However, the bulk of the expense comes from the fluctuating and variable claim costs incurred by the members each month.

What Are the Advantages of Self-Funded Insurance?

There are several reasons why a midsize employer would choose to be self-funded instead of fully-insured. While there are many similarities between the two types of insurance, the advantages of self-funded insurance are:

• Cost Savings
• Flexibility
• Cash flow benefits
• Regulatory advantage

Cost Savings: Businesses can save money with a self-funded insurance plan. These savings occur when claims come in at or under the expected projections. Further, removing the carrier profit margins that are inherent to a traditional plan increase the potential for significant monthly savings.

Flexibility: Some traditional plans can be rigid since the carrier retains full control of the available coverage levels. Self-funded plans give midsize employers the freedom and flexibility to design customized plans tailored to meet both the employees’ needs and the employers’ objectives.

Cash Flow Benefits: There are definite cash flow benefits to self-funding.  Since businesses don’t have to pay a constant premium for insurance, in months when claim utilization is lower than expected, the company can take advantage of that positive cash flow.

Regulatory Advantage: Self-insured health plans are regulated under federal law (ERISA), freeing employers from conflicting state health insurance regulations and benefit mandates.

What Are the Drawbacks of Self-Funded Insurance?

Self-funded insurance can also have some drawbacks. Before choosing a self-funded insurance plan, weigh the pros above with some of the drawbacks below to determine if it’s the right insurance for your business. Some notable drawbacks include:

• Financial risk
• Complex administration
• Variable costs
• Internal health risks

Financial Risk: With a traditional plan, you have a predictable monthly expense that only changes if your employee population grows or shrinks. However, with self-funded plans, it is less predictable. The money to pay for each claim comes from your pocket, so there can be a degree of financial risk involved if employees submit large medical claims. That risk can be mitigated with the purchase of stop-loss insurance.

Complex Administration: Administering a self-funded plan is more complicated than paying fully insured premiums. In most cases, employers will set-up a separate bank account that a TPA will draw from weekly based on the submitted claims. Working with your broker to select the right TPA is critical to the success of a self-funded plan.

Internal Health Risks: Consider the general demographics and potential health risks of your employee population. If you’re contemplating self-funding, it’s crucial to take a birds-eye view of your business and assess whether your employees have elevated health risks or a history of costly medical treatments. Gaining insights into your employees’ overall health status can help you determine whether self-funding is a feasible choice or not.

How Much Does Self-Funded Insurance Cost?

Self-funded insurance costs vary based on company size, employee health, and plan design. Notable costs include claims, administrative fees to the TPA, and stop-loss insurance premiums.

To determine how much cash is needed to cover self-insurance, employers considering this should work with a broker proficient in self-funding to conduct a feasibility study to assess the likelihood the self-funded plan will be successful.

What Are the Steps to Implement a Self-Funded Insurance Plan?

If you determine that self-funded insurance is the right path to take for your business, there are a few steps you need to take to implement it. Like any insurance coverage, crossing all your t’s and dotting all your i’s is essential, and you should ensure that everything is in order before you choose self-funding. Follow these steps to ensure a smooth transition to set up self-funded insurance.

1. Assess Feasibility: Conduct a comprehensive risk assessment and financial analysis of your business. This step helps to confirm that self-funding suits your company by assessing factors like employee demographics, health risks, and current financial capabilities.
2. Design Your Plan: Customize your self-funded insurance plan to align with your employees’ needs and company culture. This step involves designing customized benefit structures, coverage options, and cost-sharing mechanisms that cater to your workforce’s health needs and preferences.
3. Select Partners: It’s wise to identify and choose key partners to help manage your self-funded plan effectively. This includes selecting a TPA who will handle claims processing, provider networks, and other administrative tasks. Also, secure a stop-loss insurance provider to mitigate any potential financial risks associated with large claims. Finally, you will want to select a Pharmacy Benefit Manager (PBM) to handle your prescription needs.
4. Educate Employees: 88% of job seekers heavily consider job benefits when choosing the right job. Providing benefits and transparent communication about them is crucial for securing the right workforce. Educate your employees about the benefits of your plan. Provide clear information on coverage details, cost-sharing responsibilities, and education on how they can be smarter health care consumers.
5. Monitor and Adjust: Implement monitoring mechanisms to continuously track the self-funded plan’s performance. Regularly review claims data, financial metrics, and employee feedback to identify trends and areas for plan improvement. Self-funded plans are adjustable, so make sure you adjust the plan as needed to optimize benefits, control costs, and adapt to changing employee needs and market conditions.

Is Self-Funded Insurance Right for My Business?

If your business is willing to take some risk, using a self-funded insurance plan might be the right plan for you. Self-funded insurance can be a suitable choice for midsize employers with a stable cash flow, a healthy workforce, and a willingness to assume some financial risk. An effectively implemented and managed self-funded insurance plan can meet the healthcare needs of employees and support your company’s financial and long-term business sustainability.

FAQs about Self-Funded Insurance

Do I Need a Stop-Loss Policy with Self-Funded Insurance?

While not mandatory, stop-loss insurance is highly recommended to protect your company against any large, unexpected claims that could jeopardize the financial stability of the self-funded plan. Many midsize businesses are more vulnerable to the impact of large medical claims: that’s especially true if your employees are older, have pre-existing conditions, or work in hazardous occupations. Likewise, if you’re transitioning to a self-funded plan, a stop-loss policy can provide a safety net while you gather data and experience to manage the plan effectively.

What Are the Tax Implications of Self-Funded Insurance?

Self-funded plans are generally exempt from state health insurance premium taxes, which result in cost savings. However, employers must comply with some federal regulations, such as ERISA and ACA requirements.

What Is the Difference Between Level-Funded and Self-Funded Insurance?

Level-funded insurance is a hybrid approach to insurance where employers pay a fixed monthly amount to cover anticipated claims, administrative fees, and stop-loss premiums. It combines the predictability of fully insured plans with the potential cost savings of self-funded plans.

Trust Wallace Welch & Willingham with Your Self-Funded Insurance Needs

If you want to explore self-funded insurance options for your midsize business, partnering with W3 is your next step. Our team offers expert guidance and support in designing and managing your self-funded insurance plan and can help you navigate the complicated choices that go into making the right decisions. Request a quote or call us at (727) 522-7777 or toll free at (800) 783-5085 to explore how self-funding can benefit your business and provide quality healthcare coverage for your employees.