Self-funding
Self-funded Insurance
Sponsoring a health plan is important to the success of any business. It nurtures company culture, attracts high talent, and keeps employees loyal. However, it is usually one of the most expensive components of business operation. Rising costs, uncertain legislation, and an increase in health care utilization lead to many questions about how to design and finance the best health care plan.
Insurance is basically a risk transfer device. Organizations providing health care benefits to employees have two main options to choose from: self-insured plans and fully-insured plans. The main difference between the two choices is who owns the risk.
Frequently Asked Questions
Self-funding 101
Insurance is basically a risk transfer device. Organizations providing health care benefits to employees have two main options to choose from: self-insured plans and fully-insured plans. The main difference between the two choices is who owns the risk.
In a traditional, fully insured healthcare model, employers pay a premium to an insurance carrier to provide benefits to workers. Premium rates are based on the claims history, pooled risk, and the number of employees enrolled in the plan. Premiums are billed monthly and are typically fixed for a year.
In this version of healthcare coverage, the insurance carrier collects monthly premiums and pays health care claims on behalf of the company based on the benefits outlined in the plan document. Essentially, employers are prepaying insurance companies in this model and often at higher prices than market value since the carrier is at risk if claims costs exceed their expected level. It is not uncommon for insurers to set premiums at levels that include projected healthcare costs rather than current day rates.
In a self-insured model, the employer, not the carrier, is responsible for the claims. A self-funded employer pays claims as they are incurred. A Third Party Administrator (TPA) or Administrative Services Only (ASO) administers the plan. To protect the company’s finances, the employer can purchase stop loss insurance to limit the risk of catastrophic claims or over utilization. Under this structure, employers hold on to the money they would be sending to an insurance company for monthly premiums and instead pay claims directly as they are incurred by their employees. This structure enables companies to have more control over their data, benefits, and cash flow.
Companies that opt for self-funding are essentially interested in having more control over their benefit plans and want to engage at a deeper level to reduce costs and care for employees. However, every employer has a different comfort level when it comes to control, pricing, creativity, flexibility, and risk tolerance. There is a wide array of options for funding a health plan and managing risk.