Is Now the Time for Self-Insured Employee Benefits?

After a tumultuous year, what are you doing now to ensure your business continues to grow? The beating heart of any organization is your workforce, and the lifeline is a healthy cash flow. If both areas are not healthy, growth may not be possible.

Self-insured employee benefit programs can build cash flow as well as support business growth. Benefits leaders are examining these programs to protect cash flow and lower risk while providing an exceptional employee benefits program.

Cash Flow Drives Premiums

Increasing budget tensions and unique market conditions can strain an employer's cash flow. Despite cash constraints, employees still depend on their employers to provide benefit programs that protect their families. The pandemic increased uncertainty in everyone's personal and professional lives, and thriving benefit programs enhance trust throughout your workforce.

For employers in California, a largely overlooked opportunity to improve cash flow and enhance trust lies within the employer’s employee benefits program's financial structure.

When businesses have fewer than 250 employees, employers traditionally choose a benefits program on a fully-insured platform with their insurance carriers. The reason that fully-insured benefits programs are recommended for groups with fewer than 250 employees is because risks are low, costs are fixed and predictable, and plan administration burdens are minimal.

Under a fully-insured program, the risk of paying the claims is the carrier's responsibility, who then passes these costs on to employers as a fixed cost in the form of a monthly premium. Insurance carriers can then spread the risk of smaller groups over larger, pooled groups within their risk portfolio.

Clients pay their fixed premiums based on:

1. A combination of the employer’s claims experience and the carrier's pooled claims experience
2. The carrier's administration costs and burdens
3. Regulatory fees
4. Market risk

Employers with more than 250 employers must balance a fully-insured program's administrative ease and claims experience against their cash flow outflows. However, one question remains: is there a better program that improves cash flow, mitigates risk, and provides excellent benefits?

Understanding Your Self-Insured Benefits Investment

Under a fully insured program, fixed premiums inflate by 5–10% annually, even if the employer has a positive claims experience. The cost of providing health care continues to go up and insurance carriers must recover their expenses and post-margin targets. Higher premiums is an economy of scale approach for smaller groups that help them eliminate worst-case risk scenarios and keep administrative burdens away from their internal HR and Finance Teams.

When to Consider Self-Funding 

However, do larger groups with more than 250 employees have an alternative to a fixed cost, fully-insured benefits program? To explore a self-funded alternative, employers must go to the financial roots of their employee benefits program. To gain significant control over their economic foundation, employers can use the investment method to examine the benefit of their program, asking questions that include:

• What if we were able to eliminate state taxes on our programs?
• What if we were able to keep a significant amount of our budget in-house, gaining cash flow and IRR?
• What if we were able to customize our employee benefits program to mirror the competitiveness of Fortune 100 organizations?
• What if we could save 5–10% of overall health care spending every year?

As employers grow their workforce to the 250 to 500 employee range, they have expanded capabilities with their employee benefits strategy, including winning the struggle between two critical areas: cash flow and employee health. With more than 500 employees, employers can consider self-funding alternatives. Our research shows that 79% of employers with over 500 employees choose a funding option other than a fully-insured program.

Dispelling Self-Insured Myths

Financially, the fundamental difference between fully-insured and self-insured programs is an employer’s decision to fund their employee benefits. Using self-insured plans, employers can reduce their fixed administrative and regulatory expenses by 5–10% annually. Employers using a self-insured budget can forecast only for their own group’s claims experience as opposed to the pooled approach that carriers use. To offset the risk of catastrophic costs, employers will purchase a stop-loss policy to offset potential high claims.

Self-insured programs have been a market option for many years. However, employers have avoided these policies because of market myths that include:

• Too risky: Employers often felt that self-insured programs are a gamble they are not willing to take. If the employer has large claims, they are concerned that their cost would be much higher than a fully-insured benefits program and potentially cause financial hardship for their business.
• High administrative burden: Employers are concerned that they don’t have the resources to manage a self-funded program. Also, the administrative and accounting burden would be too much for the organization to handle. Many employers are running lean on Accounting and HR staff and may lack the capacity to manage a self-funded program.
• Not enough savings: Will a self-funded program save us enough money? Will our investment pay off? While there may be savings on paper, without experience, employers can be leery of switching plans.

These concerns are merely common misconceptions. Today’s self-insured strategies result in program designs that dispel each of these concerns. New plan designs mitigate risk, minimize administrative burden, and create an accelerated return rate that results in an attractive long-term ROI.

Self-Insured Programs Have Evolved Based on Employers' Risk Tolerance

Traditional self-insured programs have evolved and now include customized stop-loss policies that can be structured based on the employer’s risk tolerance. Stop-loss policies are a crucial component of self-insured programs because they create a limit on the employer’s risk in any given policy year.

For example, it is now possible for an employer to ensure they cap their liability for any large claim at a specific dollar amount. The employer pays the deductible up to the desired level, and the stop-loss policy pays the remaining claim liability. If the employer has a challenging year and their claims and expenses are forecasted to be high, they can use a stop-loss policy to limit their exposure.

The reality is that self-insured programs are a viable, cost-saving option for employers. These programs have evolved to offer both cost-savings and flexibility while mitigating potential claims risk.

What to Expect at Renewal Time

Employers with a fully-insured program can expect a large renewal increase if their claims experience is poor. Over the long term, the insurance carrier will always make a profit and will charge employers an increased amount to pay for the higher costs of their entire risk pool, in the year following the increased claims.

If an employer’s claims experience is poor with a self-insured program, they will exceed their budget in that particular year. For both fully-insured and self-insured, employers pay for their increased claims. This is simply a cash flow-timing difference.

However, if an employer is on a fully-insured program and their claims experience is excellent, they may receive a lower renewal rate. Still, the insurance company is making a large profit. If the employer’s claims experience is positive in a self-insured program, the employer gains all the savings.

A self-insured program will typically be significantly less costly over the long term than a fully-insured program. Employers reap the benefits of program savings while limiting their high-risk exposure and protecting their cash flow.

Explore Your Self-Insured Options

Woodruff Sawyer helps employers evaluate their self-insurance options, to reduce risk and administrative burden while optimizing cash flow. We help employers build an employee benefits strategy that fits their financial and risk profile while offering exceptional benefits for their workforce.

Woodruff Whiteboard Breakdowns: Self Funding Your Health Plan