Funding for employee benefits: one size doesn’t fit all
The US healthcare delivery system is plagued by increasing costs, burdensome regulation and declining access and coverage. Despite widespread criticism, a formal reform or repeal of the Affordable Care Act (ACA) seems unlikely. Employers, particularly small and mid-sized businesses, struggle to offer competitive benefits while managing the significant cost of insurance. Employers are therefore exploring self-funding options to gain control of escalating costs.
Self-funding can create valuable cost savings and enhanced cash flow, as claims are only paid if and when they arise.
Fully insured versus self-insured plans
The traditional approach to employer healthcare coverage has been through fully insured plans whereby risk is transferred to a commercial insurer. The insurance company collects a fixed premium, based on the number of employees, and manages plan administration and claims. Fully insured plans can simplify the process of offering health insurance but are often characterised by high premiums, volatile annual increases and limited coverage and customisation options, regardless of the actual claims history or risk pool.
With the self-funding or a self-insured approach, the employer retains the financial risk of providing certain employee benefits to his or her employees. Rather than paying a predetermined premium upfront, expenses are paid as they are incurred. Third-party administrators (TPAs) process claims and provide other services based on the chosen employee benefit plan.
The obvious risk in self-funding is a catastrophic claims situation. Fortunately, employers can protect against unpredicted claims and avoid financial distress. While larger employers typically have enough financial reserves on hand to cover nearly any healthcare costs, some smaller businesses may not have a large reserve. To cover catastrophic claims, these businesses rely on stop-loss insurance, where employers are reimbursed for any claims that fall above a specific dollar amount.
Benefits of self-funding
The most compelling reason to switch to a self-funded model is the effect on the employer’s bottom line. Self-funding can create valuable cost savings and enhanced cash flow, as claims are only paid if and when they arise. After claims and expenses are paid, the employer retains the money that would typically be collected as fees and underwriting profits for a commercial insurance company.
Other cost savings may arise due to greater control of plan design and deciding what benefits will be included to meet the needs of a specific group of employees. Self-funding employers may also pay less in insurance premium taxes and on operational expenses as they are purchasing less insurance overall.
Self-funding also offers increased flexibility and plan control as employers can work with the TPA to design a custom solution for their members’ needs, and adjust them over time, without being penalised by the performance of others in the marketplace. Typically 20 percent of employers have the most claims, and they are subsidised by the other 80 percent. Employers who self-insure are less reliant on the volatile commercial insurance market, allowing for greater long-term pricing stability regardless of market conditions.
Self-funding also increases control over cash flow. Rather than a fixed monthly commercial premium that prefunds claims long before they happen, the self-funded employer has more flexibility to pay for claims as they arise, or to prefund through an alternative risk structure while retaining control of the funds.
Too small to self-fund?
Although most self-funded health plans have over 200 employees, there are also valuable self-funded options for smaller employers. Such employers are encouraged to purchase both specific stop-loss, which provides coverage for each individual, and aggregate stop-loss, which covers the total annual cost of the plan. This ensures there is a limit to the per-member and plan annual cost that cannot be exceeded.
Employers with as few as fifty employees, with solid claims history and a commitment to control and long-term stability, can also enjoy the benefits of self-funding.
Emilie Gastley is director of marketing at Captive Alternatives. She can be contacted at: egastley@captivealternatives.com
