Self-funding can sometimes be a tough concept for employers to wrap their heads around, especially if they’re used to fully insured health plans.
Self-funding can be a smart business strategy for cost control, choice, and creating the right plan for each business. But how does it work, and why should companies consider self-funding as a strategic tool?
What is self-funding?
Companies have options when it comes to their health benefits plans. Many companies go through insurance companies to create fully insured plans for their employees. Self-funding means that an employer pays for employees’ medical claims as they occur, typically from a dedicated fund consisting of corporate and employee contributions. Alternatively, a “stop loss” or reinsurance policy is put in place to cover claims over a specific deductible for each employee; this is referred to as a partially self-funded plan. Both types of plans can be a good option for small- to medium-sized companies that may struggle with high insurance costs and decreasing benefits for their employees.
The role of a third-party administrator (TPA)
Companies who choose self-funding plans often turn to the expertise of a third-party administrator like HealthEZ to process their insurance claims. TPAs can also help design the right plan, facilitate and administer claim payments, contract for PPO services, and provide analytics and claims reviews.
Why should companies self-fund?
There are many reasons a company might choose a self-funded benefits plan over a fully insured plan. Among the top are flexibility, the opportunity save and retain money, and the ability to create a medical plan that is right for you and your employees.
Customization
When you go the self-funding route, you can create the benefits program that is best for your employees. As you get used to using the new plan, you can make changes as needed, creating a truly individual plan that fits your company’s needs.
It saves you money
You pay for care when it’s needed and keep the money in your self-funded plan pool when it’s not. Since you are not beholden to an insurance company, rate increases year-over-year are much less than with traditional plans—typically less than three percent, compared with double-digit increases in a fully funded plan. In addition, self-funded plans are exempt from certain taxes and fees.
Freedom to use the providers/networks that work best
Traditional plans often limit provider and network choice. In a self-funded plan, network selection can be flexible and customized to geography and employee preferences. In-network incentives can still be used to reduce cost but employees are able to see the doctor of their choice.
The pros and cons of self-funding
There are a lot of factors to consider when deciding to opt for a self-funded health plan. Here’s a quick list of pros and cons to keep in mind when doing your research.
The Pros
Flexibility – You to create the plan that works best for your company and employees, without being locked into provider networks or other restrictions.
Control – You select the plan vendors you want to use, which gives you more insight into what you’re paying for.
Lower claims = money saved – Often, claims are lower with self-funded plans. This means your health plan budget goes a lot further.
Less costly – With self-funding, there are no profit or risk margins that you need to pay to a corporate insurer, and you also don’t incur state premium taxes.
Independence – Since self-funded plans are fully independent, they are not subject to state insurance laws and mandates.
Data – You have easy access to claims and usage data so you can identify trends and cost-saving opportunities.
The cons
Unpredictability – It can be difficult to forecast expenses for the coming year, which can make budget-planning uncertain. HealthEZ provides robust analytics to let you see how your program is performing, which is helpful in forecasting year over year.
Inefficiencies – If your self-funded plan isn’t designed to mitigate risk, you could potentially lose money. Working with an experienced TPA like HealthEZ ensures you get a plan that mitigates risk and provides a solid stop-loss tool.
Learning curve – There can be a risk of regulatory penalties due to claims or reporting errors, or a risk of higher costs due to extraordinary claims. Here again, an experienced TPA like HealthEZ will help you implement your new plan so everyone understands how it works.
Curious if self-funding is right for you?
When you partner with HealthEZ—the self-funding experts—we help you build self-funded benefits plans that work harder, fit better, and control costs. Get in touch with us today and we’ll help guide you to the plans that works best for you.
If your broker isn’t familiar with self-funding, we’re happy to help. Don’t have a broker? We can help with that, too!