Self-Funding Health Benefits
Self-funding an employee benefit plan is a smart long-term strategy to controlling health care costs. Establishing a self-funded health plan can be an integral part of a company’s growing business. Once thought of only for companies with more than 200 employees, we are now seeing this option for groups as small as 50 employees.
Traditional self-funding is defined as when an employer pays for their own medical claims directly, while a Third Party Administrator (TPA) administers the health plan. The administration of the health plan includes processing claims, issuing ID cards, and performing many other tasks on behalf of the group. Most companies that purchase self-funded plans also invest in stop-loss insurance. Stop-loss insurance limits the amount of claims expenses the employer might incur. If claims are lower than expected the employer could save money directly compared with a fully insured plan.
Advantages of Self-Funding a Group Health Plan
- Pay, at a discount, actual claims only
The ability to pay only the actual claims is often the primary reason for an employee to choose a self-funded plan.
1. Know what you are paying for and where the money is going
With a self-funded plan, claims reports are available to help you understand exactly where health care dollars are being spent. This allows for more informed decision making when considering benefit changes and wellness programs.
- Offer the same plan for multi-state companies
Most self-funded plans are not subject to state-specific mandates. Certain tax advantages on stop-loss premiums may also be available compared to a fully insured plan.
- Design your own benefits
For smaller employers, a self-funded health plan provides the group complete control on the benefit plan design they put into place. Fully insured health plans have little flexibility on plan design.
- Fewer surprises
Groups on self-funded plans have full knowledge of ongoing claims. Accurate data reports and financial statements enable a group to be fully aware of how the plan is performing. On a fully insured plan, surprises often show up at renewal; self-funded plans avoid those surprises.
1. Misperceptions about Self-Funding
A big misperception about self-funded plans is that they’re only for groups of more than 200 people.
With the development of individual stop-loss insurance, small groups are able to take advantage of the benefits of a self-funded plan. Individual stop-loss insurance reimburses the employer’s health plan for claim amounts above the individual stop-loss limit. For example, an individual with stop-loss insurance of $25,000 has $100,000 in claims. The stop-loss insurance would reimburse $75,000. Additional claims on that individual would be reimbursed for the rest of the plan or calendar year. Individual stop-loss insurance begins as low at $10,000, which will help a smaller company with a self-funded health plan.
In addition to individual stop-loss insurance, most self-funded plans purchase aggregate stop-loss insurance. Aggregate stop-loss insurance is similar to individual stop-loss insurance but reimburses when total health claims are reached.
Risks with Self-Funded Health Plans
- If the maximum claim liability is higher than a fully insured plan – The claim liability on a self-funded plan should be considered when choosing a self-funded plan.
- Run out claims – If a company ends its agreement with a self-funded plan, it still needs to budget for claims, stop-loss insurance premiums, and administration fees. Also known as Terminal Liability, these are claims that were incurred during the plan year but received after the termination date of the self-funded contract.
- Claims litigation liability – On a self-funded plan the employer is solely responsible for any judgments on claim payment decisions. This would be the result of a denied claim that was overturned by a court’s judgment. Claims litigation liability seldom happens but is something to take into consideration.
If you represent a group with as little as 50 employees, you now have the option of a self-funded employee benefit plan. Low individual stop-loss insurance and aggregate stop-loss insurance can limit a small employer’s risk. A self-funded plan is the best way to take full control of employee group benefits.
Nefouse & Associates is dedicated to helping clients get the best deal on any self-funded plan design. Our clients benefit from our long-term relationships with the insurance companies. If you are looking for self-funded plan options, please let us know how we can serve you.