Employers gain significant advantages when they implement self-funded healthcare plans, regardless of size:
Financial and administrative control
Administration of a health plan is an invisible process to a group whose health plan is fully insured. Each month, the organization pays a premium, which includes charges for administration of the plan, as well as reasonably expected claims, and the insurer performs all administrative tasks—outside the organization’s vision or control.
- When a group makes the change to self-funding, it assumes responsibility for administration of the health plan. With this responsibility comes the ability to:
- Operate efficiently and effectively.
- Detect areas where modification of systems and processes may be desirable or necessary.
- Make continual improvement in plan operations, with a goal of optimizing plan performance, improving employee satisfaction and, ultimately, saving money.
Improved cash flow
Organizations that self-fund their health plans receive significant cash flow advantages.
1st Advantage – pay as you go
Under a fully insured health plan, the employer pays premiums to pre-fund claims and other costs. The insurer uses these pre-paid funds to pay plan participants’ claims. In addition, the insurer retains a portion of the premiums to cover overhead costs and to compensate itself for the services it performs and the financial risk it assumes.
A group with a self-funded plan does not pre-fund its claims costs. Rather, the employer pays claims as they are incurred. This allows the employer, not the insurer, to invest and receive returns on unused claims funds. Of course, many small organizations use TPAs for claims administration and plan management; however, TPA charges typically are lower than those of traditional insurers.
2nd advantage – claims liability
At the end of a plan year in which claims have been lower than anticipated, a traditional insurer keeps the premiums and no savings are returned to the fully insured group. When claims paid by a group’s self-funded plan are lower than anticipated, the savings belong to the employer alone.
3rd advantage – premium taxes
Self-funded health insurance plans are liable for state taxes only on stop loss premiums. Conversely, fully insured plans are liable for state premium taxes on total plan cost. According to industry experts, this disparity results in direct, automatic savings to a company that self-funds. These savings are estimated to be two to three percent of the premiums’ dollar value.
All the cost-saving advantages of a self-funded health plan help employers beat ever-increasing healthcare trends and leave more money to be invested back into the success of the organization.
Traditional insurers offer one-size-fits-all health plans. As a result, a group with a fully insured health plan may be forced to pay for benefits its employees will not use. Also, the employer may be unable to offer other benefits its employees particularly need.
The flexibility of self-funding allows an employer to custom design a cost-effective health plan tailored to employees’ specific needs. For instance, high-cost benefits that employees do not value can be eliminated, and replaced by benefits that employees want—often for a lower cost.
With the help of experienced plan design specialists, a company can identify additional cost-saving opportunities while custom building a plan that supports corporate objectives and offers a range of options matching the needs of a diverse workforce. For example, a group may:
- Develop a more cost-effective plan by excluding or limiting non-applicable benefits, while still meeting employees’ needs.
- Implement a care management program to direct participants toward the most efficacious and cost-effective medical care.
- Offer alternative health plan options, such a Consumer-Directed Health Plans (CDHPs).
- Provide coverage for alternative treatment procedures, such as chiropractic services and acupuncture.
- Design prescription drug plans that provide cost-saving opportunities.
The flexibility of self-funded health plans offers another important advantage to companies with multiple locations. Because self-funded plans are not bound by state law requirements, a multi-location company is not burdened with managing multi-state plans. Instead, the company can design and manage a single self-funded plan that fits the needs of employees in diverse locations.