How Self-Funding Can Save You Money on Employee Benefits

Have you considered self-funding to save money on employee benefits? This model is becoming increasingly popular with businesses of every size. According to a recent survey by the Kaiser Family Foundation, about 13 percent of small employers and 81 percent of large employers are currently self-funding their health benefits plans.

How Self-Funding Works

With a traditional fully insured health plan, an insurance carrier takes on the financial risk of covering your employees’ health care costs. You pay monthly premiums to the carrier, which then covers fixed costs and pays out claims.

With self-funding, instead of paying premiums to an insurance carrier, employers assume the risk of providing health benefits to their employees. You, as the employer, assume the financial risk of your health-care plan by paying your employees’ claims directly. Obviously, this strategy sounds risky, but if managed well, it could save you a lot of money and enable you to provide better benefits to your employees.

Self-funding is generally used in conjunction with stop-loss insurance, which caps the annual amount you pay out in the case of unusually high claims years or unpredictable catastrophic claims. On the flip side, if you have a year with low claims, you — rather than your carrier — benefit from the savings.

Companies that move to self-funding must be financially stable and willing to take a bit of a risk. But with skilled risk management, this strategy can save you a lot of money over a fully insured health plan. If your claims are low, you could be leaving a lot of money on the table. This is why more and more employers are turning to the self-funding model.

Most larger companies pay claims as they are processed. Some companies are eligible to use a specific type of self-funding called level funding, in which you make a monthly payment that comprises your projected claims plus an aggregate margin, a monthly administration fee and a premium for stop loss. Employers who have high claims for a renewal period receive a renewal similar to fully insured carrier renewals. Employers who have low claims will receive a check or credit back every year after their renewal.

Here are some attractive features of this funding model:

  • Plans tailored beyond what most fully-insured carriers offer
  • Financial predictability and control
  • Rebates in favorable claims years
  • Up-front determination of maximum annual exposure and cost
  • Defined and contained risk
  • No requirement to pay an industry insurance fee

Advantages of the Self-Funding Model

Self-funding offers a number of potential benefits to employers under the right circumstances:

  • If you have a low-claims year, you will get a financial windfall.
  • You can better customize your health-care plan to suit the needs of your employee population.
  • Self-funding eliminates the “risk charge” assessed by traditional carriers, which reduces your overall insurance costs.
  • You don’t have to pay state premium taxes, which means a savings of 2 to 3 percent on annual premiums.
  • Self-funded plans are not subject to ACA-mandated essential health benefits. (They are subject to ERISA compliance.)
  • You get full access to your claims data, which you can analyze to better adjust your funding strategy and leverage to promote a company culture of health.

How to Begin Self-Funding

You will most likely want to go through a third-party administrator, like Superior Benefits, that can provide expertise in administrating a health-care plan and possibly offer a level funding arrangement. Level funding means that you pay a flat monthly fee based on projected claims, administrative costs and premiums for stop-loss insurance.

We can help you determine whether self-funding is a good option for you. We will focus on two types of analysis, in general:

  1. Look back: We will analyze how your plan would have performed in the past few years, had you been self-funded. This means looking at what you paid in premiums versus actual claims.
  2. Look forward: We will estimate your upcoming proposed premiums with a fully-insured plan. Then we will compare that estimate with your estimated cost for a self-funded plan. This includes predicted claims based on group-specific data, administration fees and a quote for stop-loss premiums.

If you excel at risk management and want to take more control over your health-care plan, talk to us about moving to self-funding.

Superior Benefits offers a risk-free solution through a level funding arrangement. With defined and contained risk, your maximum exposure and annual costs are determined up-front. You will never pay more than this monthly cost. If you decide to leave your Level Funded Carrier, there are no penalties, and you will owe no additional money.

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