Self-funding is an approach to financing an employer’s health benefit offering that provides greater flexibility and control, while offering the opportunity for significant savings. Though it isn’t ideal for all employers, many can benefit from a self-funded (or level-funded) plan as opposed to the traditional fully insured model.
Self-funded health insurance plans are employer-provided coverage not purchased from an insurance carrier (i.e., the employer pays the claims themselves). The employer assumes a greater risk, but also has greater potential for savings than with fully-insured plans.
Understand how self-funded and level-funded plans differ from traditional fully insured benefit plans in this guide.
Self-funding can be confusing at first and can lead to employers setting up plans in a way that doesn’t help them, but actually negatively impacts their bottom line. Here are some of the common pitfalls to self-funding—all of which can be avoided with proper planning:
When clients are considering self-funding, they need to take special care to ensure their plan includes some specific elements that they may not have considered with previous plan types.
There are two basic kinds of stop-loss coverage:
Stop-loss coverage reduces the overall risk of self-funding for the employer. It basically ensures that when claims are extremely high, for an individual or total, the employer will not be responsible for all of the costs.
There are limits to what stop-loss covers. For example, for stop-loss reinsurance (specific stop-loss), the maximum per-claim amount is often $1,000,000. Employers should be aware of what their stop-loss limit is when they design their plan to ensure they aren’t surprised by additional costs if they exceed their stop-loss limit.
In addition, employers should be aware that when stop-loss kicks in to pay for excessive claims, the plan premium may increase in future plan years. This could mean that if one employee experiences a catastrophic claim in a specific plan year, the cost of the plan paid for by employees may go up for all employees in future plan years to account for a higher premium cost for that one employee.
TPAs handle a lot of the behind-the-scenes details of self-funded plans, including:
In order to successfully switch to self-funding, it’s pertinent to have a broker who is familiar with it. There are many details to self-funding your benefits plan that should not be overlooked, so finding an experienced broker is key.
A PBM provides services and education to aid covered employees and their families with the appropriate prescription of drugs for maximum effectiveness. These services may include:
With self-funding, employers have the flexibility to build plans that work for their organizations and employees. They are able to include services such as:
In summary, a network is a group of providers that has agreed to provide a discount to covered individuals when utilizing their services. Employers must decide if they want to offer a broad or narrow network.
Some employers may choose to use similar networks to the ones utilized prior to switching to self-funding, and others may not. Network flexibility is a benefit of self-funding, but the network should be chosen carefully, with historical claims data in mind, to ensure the proper balance of employee satisfaction and employer cost savings.
To understand self-funding better, it helps to know how this plan type differs from other plan types you may be familiar with.
Level-funded health insurance plans are actually a type of self-funded plans. But how does that work?
Instead of the employer simply paying claims as they go, a TPA determines a customized monthly payment amount for the employer. That payment amount doesn’t change throughout the year. It includes the following:
What happens is that when claims come in, the claims are paid out of the claims allowance. The TPA handles this. Since the employer is paying a specific monthly amount, costs are more predictable than with standard self-funded plans.
If, at the end of the plan year, the claims paid out are less than the amount allotted for, the employer may receive money back. It is important to understand that with level-funded plans, TPA fees and stop-loss premiums may be weighted higher than the claims allowance, so with the predictability of the plan, there may not be a claims excess at the end of the plan year, even if claims are lower than expected.
With a level-funded health insurance plan, there may be slightly higher fees than with a self-funded plan (still lower than with fully-insured), however, the employer is never caught off-guard with unexpected expenses throughout the plan year.
Level-funding can be a good first step toward self-funding.
Self-funding can be an advantageous approach to providing employee benefits for many employers, depending on size, risk profile, employee population and other factors. Employers interested in exploring self-funding should ask their insurance broker to learn more.
HPS provides a unique and highly effective provider network to self-funded and level-funded employers, including financial wellness tools for employees and their families. Get in touch to learn more!