What Are Self-Funded Health Plans?

Many employees—and some employers—don't realize how much companies pay for fully funded health insurance premiums. According to the KFF 2022 Employer Health Benefits Survey, premiums cost an average of $7,911 for single coverage and $22,463 for family coverage per employee. At these rates, a company of just 100 employees could pay more than a million dollars in premiums.

Based on historical pricing trends, premium costs will continue to rise. Over the last five years, the average premium for family coverage has increased 20%, and 43% over the last 10 years. Taking inflation into consideration, next year's premium costs could see an even steeper increase.

How can employers control—and even lower—the cost of employee benefit plans?

Switching to a self-funded health plan, also known as a self-insured health plan, is one solution. It can save companies 8%–10% per year and could provide the control employers are looking for.

What Is a Self-Funded Health Plan?

Most health insurance plans at small to mid-size companies are fully funded, which means they pay an insurance company a premium and have them pay the claims. When a company self-funds, the plan administrator tallies up the claims, then charges the company for the cost plus an administrative fee. The self-funded employers don’t have to pay premiums because they’re paying for the claims instead.

How Self-Funding Your Insurance Plan Benefits Your Business

Employers that self-fund typically find the following to be advantages of their benefits plans:

Data Ownership

Self-funded plans allow companies to own their data and take a deeper dive into analytics. This is helpful because a broker can use the data to mitigate risk while ensuring members get better care.

This will allow you to:

• Adjust plans
• Set your own rates
• Find solutions to better suit employee needs

Flexibility

Self-funded plans are usually more flexible because you can design your own plan and control more options, like selecting vendors that specialize in certain areas and are less expensive. For instance, plans that allow using a third-party pharmacy benefit manager have saved some companies 20%–40% on their drug spend alone. Additionally, almost all self-funded plans give the plan sponsor the flexibility to select the stop-loss carrier of their choosing.

Reduced Costs

A self-funded health plan will typically cost significantly less over the long term than a fully funded program.

Companies that self-fund usually save 8%–10% on their healthcare costs because they:

• Don't pay for insurance carriers’ profit margins through premiums
• Get to invest their reserves and earn returns on that money
• Don’t have to pay state taxes on what they self-insure

What Are the Risks of Self-Funding?

Often, people think the biggest disadvantage related to self-funded healthcare plans is the financial risk. It’s understandable, because the thought of paying the claims for all your employees can be daunting, especially when you don’t know how many claims they will have in a year or how costly those claims will be.

However, the only real risk a company with a self-funded health plan takes on is cash flow variability. You also don’t have to take on all this risk at once. Very few companies are completely self-funded. Instead, most only partially self-fund with the help of stop-loss insurance.

Some considerations employers face when becoming self-funded include:

• A learning curve for Human Resources and finance leadership
• Accounting complexity
• Monthly cost variability

What Is Stop-Loss Insurance?

Stop-loss insurance limits your liability for claims to a certain dollar amount. Getting this coverage helps you balance your risk against large claims while maintaining affordable premiums.

The two types of stop-loss insurance that can limit the financial risk for self-funded employers are:

• Individual/Specific: This puts a cap on the dollar amount of claims you must pay for each individual
• Aggregate: This is a cap against all the claims your company might have in a year

How Do Self-Funded Plans Work?

Both fully funded and self-funded insurance health plans must follow applicable federal requirements and mandates, including those imposed by ERISA, the Internal Revenue Code, the Affordable Care Act, the No Surprises Act, the Transparency in Coverage Final Rule, and others.

Most State Insurance Mandates Do Not Apply to Self-Funded Plans

Self-funded plans typically aren’t required to abide by as much state regulation. This can offer many benefits to plan sponsors, including avoiding state health insurance premium taxes and most state insurance mandates.

How Are Claims Handled?

Claims for self-funded health plans are handled by Third Party Administrators (TPAs) who process the claims, facilitate plan exceptions, and support member communications. A TPA offers services via the Administrative Services Only (ASO) agreement and can integrate with some or all carrier networks, stop loss insurers, PBMs, and point solution vendors.

How Beneficial Are Claim Reports Provided by a TPA?

Third-party administrators must track claims and provide reports to employers. These reports are helpful because they include information that can help companies find ways to lower costs, customize their self-funded health plan, and improve their wellness strategy.

Is Self-Funding Right for My Business?

Self-funded health insurance isn’t the best option for every company. For example, companies with smaller cash flows might find their claims take too much money away from the funds they need to run their business.

Self-funded employers have a few things in common:

• Cash flow: Self-funded health plans are good for companies with plenty of cash flow. When self-funded employers have enough cash reserves to weather claims, they almost always come out ahead of what they’d pay an insurance company in premiums, especially in the long run.
• Size: While cash flow is the primary consideration for self-funding, most companies that transition to self-funded insurance do so when they have between 100–500 employees. Large companies with 500+ employees are likely already self-funded or have a good reason for staying fully funded.

Work With a Knowledgeable Broker

One of the biggest factors to successfully move into a self-funded program is working with a knowledgeable broker who can guide you through the process, explain how to reduce your risks, and ensure you have the correct data and calculations for a smooth transition. If you have any questions, contact the specialists at Woodruff Sawyer.