Is Self-Funding Right For Me?
The first thing to bear in mind regarding partially self-funded plans is that the plan is a concept more than a product. It’s a long term investment having to do with financing employee health care benefits. The second thing is that, for many employers, it is a concept that has helped them save thousands of dollars in health insurance premiums.
Self-Funding vs. Fully Insured
- Employers pay a fixed monthly premium payment to their insurer
- Premium payment covers expected claims and all administrative costs
- If actual claims are lower than expected, the insurer keeps the difference
- If actual claims are higher than expected, the insurer pays the difference
- Employers have a choice how they want to fund their medical benefit plans
- Employers typically pay a fee to a third party administrator (TPA), who processes claims and works with health care providers to secure discounted services
- Employers take on their own risk and liability of their employees’ claims
- Most Employers purchase Stop Loss insurance to limit catastrophic liability on their plan
- If actual claims are lower than expected, the employer keeps the difference
- If actual claims are higher than expected, the Stop Loss Carrier will pay the difference
Benefits of Self-Funding:
- Elimination of most premium tax – Self-Funded arrangements are exempt from most state mandates such as premium tax
- Lower cost of operation – Employers may find that administrative costs for self-funded programs are lower than fully insured
- Improved cash flow – Faster turnaround of funds between the employer funding the claims and the actual claim payments
- Potential savings – When claims are lower than expected, the employer retains the financial savings. Self-funding employers also benefit from reduced premium taxes.
- Ability to Purchase Stop-Loss Insurance – your maximum exposure is capped
- Plan design flexibility and control – Employer has complete control of all aspects of the health plan and design
Insurance companies are looking for a profit:
Insurance companies, offering fully-insured products, try to price their products in such a way that, in the long run, will assure the high probability that they will earn a profit. Therefore, the premium paid by most employers to insurance companies for group health insurance far exceeds the actual claims and administrative costs generated by their plan. At best, employers are really just “trading dollars” with the insurance company and, in fact, are already “paying for their own claims.” The most efficient means of providing these benefits, therefore, is through self-insurance.
According to ERISA (Employee Retirement Income Security Act), an employee welfare benefit plan is any plan, fund, or program which is established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing:
- Medical, surgical, or hospital care or benefits;
- Benefits in the event of sickness, accident, disability, death or unemployment;
- Vacation benefits;
- Apprenticeship or other training programs;
- Day care centers;
- Scholarship funds;
- Prepaid legal services, or
- Certain other benefits described in the Labor-Management Relations Act of 1947
ERISA has also been expanded to include health laws. For example, the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) amended ERISA to provide for the continuation of health care coverage for employees and their beneficiaries (for a limited period of time) if certain events would otherwise result in a reduction in benefits. In addition, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) amended ERISA to make health care coverage more portable and secure for employees.
Predictive Modeling – GRx
Health insurance companies are looking at prescription usage to underwrite and rate group health insurance. GRx quoting is a way to get final rates without applications or claims data. This method uses a detailed census for a group to obtain complete and current prescription histories. Details include drug name, dosage, fill date, pharmacy and physician information.
This Healthcare Intelligence allows carriers to make risk assessment decisions with confidence and more accurately develop premiums. New group rates are quickly and more accurately developed. GRx turns the group census data into a risk score. Health plans use the GRx risk score to more accurately predict the group’s future claim costs. An accurate quote is good for both the insurance company and the group.