Is Self-Funding the right choice for your organization?
Contact GPI today to discuss the advantages of self-funding your companies group health insurance plan. According to a 2009 report by The Society for Human Resource Management, 47 percent of employees in the 200 to 999 employer groups were in a self-funded group health plan. Self-funding does have its advantages and disadvantages. Learn more below about self-funding then contact GPI and speak with one of our advisors.
What is Self-Funding?
A Self Funded, or Self-Insured plan, is one in which the employer assumes the financial risk for providing health care benefits to its employees. In practical terms, Self-Insured employers pay for claims out-of-pocket as they are presented instead of paying a pre-determined premium to an insurance carrier for a Fully Insured plan. Typically, a self-insured employer will set up a special trust fund to earmark money (corporate and employee contributions) to pay incurred claims.
What is a TPA?
A third party administrator (TPA) is an entity that processes or adjudicates claims for an employee benefit plan. A TPA may provide additional services to an employee benefit plan or employer, such as collecting premiums, contracting for PPO services, providing utilization review of claims, and similar ancillary services to the operation of the employee benefit plan. Self-insured employers can either administer the claims in-house, or subcontract this service to a TPA.
Why do employers self fund their health plans?
There are several reasons why employers choose the self-insurance option. The following are the most common reasons:
- The employer can customize the plan to meet the specific health care needs of its workforce, as opposed to purchasing a 'one-size-fits-all' insurance policy.
- The employer maintains control over the health plan reserves, enabling maximization of interest income - income that would be otherwise generated by an insurance carrier through the investment of premium dollars.
- The employer does not have to pre-pay for coverage, thereby providing for improved cash flow.
- The employer is not subject to conflicting state health insurance regulations/benefit mandates, as self-insured health plans are regulated under federal law (ERISA).
- The employer is not subject to state health insurance premium taxes, which are generally 2-3 percent of the premium's dollar value.
- The employer is free to contract with the providers or provider network best suited to meet the health care needs of its employees.
Advantages of a self-funded health plan
Companies gain significant advantages when they implement self-funded healthcare plans, regardless of company size:
- Financial and administrative control
- Improved cash flow
- Plan flexibility
Financial and administrative control
Administration of a health plan is an invisible process to a company whose health plan is fully insured. Each month, the company pays a premium, which includes charges for administration of the plan, as well as reasonably expected claims, and the insurer performs all administrative tasks—outside the company’s vision or control.
When a company makes the change to self-funding, it assumes responsibility for administration of the health plan. With this responsibility comes the ability to
- Operate efficiently and effectively.
- Detect areas where modification of systems and processes may be desirable or necessary.
- Make continual improvement in plan operations, with a goal of optimizing plan performance, improving employee satisfaction and, ultimately, saving money.
Improved cash flow
Companies that self-fund their health plans receive significant cash flow advantages.
First advantage—pay as you go
Under a fully insured health plan, a company pays premiums to pre-fund claims and other costs. The insurer uses these pre-paid funds to pay plan participants’ claims. In addition, the insurer retains a portion of the premiums to cover overhead costs and to compensate itself for the services it performs and the financial risk it assumes. A company with a self-funded plan does not pre-fund its claims costs. Rather, the company pays claims as they are incurred. This allows the company, not the insurer, to invest and receive returns on unused claims funds. Of course, many small companies use TPAs for claims administration and plan management; however, TPA charges typically are lower than those of traditional insurers.
Second advantage—claims liability
At the end of a plan year in which claims have been lower than anticipated, a traditional insurer keeps the premiums and no savings are returned to the fully insured company. When claims paid by a company’s self-funded plan are lower than anticipated, the savings belong to the company alone.
Third advantage—premium taxes
Self-funded health insurance plans are liable for state taxes only on stop loss premiums. Conversely, fully insured plans are liable for state premium taxes on total plan cost. According to industry experts, this disparity results in direct, automatic savings to a company that self-funds. These savings are estimated to be two to three percent of the premiums’ dollar value.
All the cost-saving advantages of a self-funded health plan help employers beat ever-increasing healthcare trends and leave more money to be invested back into the success of the company.
Traditional insurers offer one-size-fits-all health plans. As a result, a company with a fully insured health plan may be forced to pay for benefits its employees will not use. Also, the company may be unable to offer other benefits its employees particularly need.
The flexibility of self-funding allows a company to custom design a cost-effective health plan tailored to employees’ specific needs. For instance, high-cost benefits that employees do not value can be eliminated, and replaced by benefits that employees want—often for a lower cost.
With the help of experienced plan design specialists, a company can identify additional cost-saving opportunities while custom building a plan that supports corporate objectives and offers a range of options matching the needs of a diverse workforce. For example, a company may:
- Develop a more cost-effective plan by excluding or limiting non-applicable benefits, while still meeting
- Implement a care management program to direct participants toward the most efficacious and cost-effective
- Offer alternative health plan options, such a Consumer-Directed Health Plans (CDHPs).
- Provide coverage for alternative treatment procedures, such as chiropractic services and acupuncture.
- Design prescription drug plans that provide cost-saving opportunities.
The flexibility of self-funded health plans offers another important advantage to companies with multiple locations.Because self-funded plans are not bound by state law requirements, a multi-location company is not burdened with managing multi-state plans. Instead, the company can design and manage a single self-funded plan that fits the needs of employees in diverse locations.