Introduction

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.

 

What is self-funding?

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. 

  • Risk
    Self-funded insurance plans have a higher risk than fully-insured plans since the employer is taking responsibility for paying claims, though stop-loss insurance protects against catastrophic claims.

  • Regulations
    Self-funded plans are subject to ERISA (Employee Retirement Income Security Act), meaning plans are subject to regulations related to participant rights and access to plan information. Also subject to elements of ACA.

  • Costs
    Self-funded plans include the following costs:
    1. Fixed costs—Administrative fees, stop-loss premiums, other TPA or carrier fees
    2. Variable costs—Payment of claims

  • Savings
    There is no need to pay state health coverage mandates, insurance company risk charges, or certain ACA-related fees. There is also more flexibility in plan design that can help manage costs.

  • Logistics
    The employer works with a broker and TPA to create a plan and choose a network, uses the TPA to handle claims and may use stop-loss insurance to protect themselves from catastrophic claims.


HPS_Infographic_August2019_FlatBorderSelf-Funding vs. Level-Funding vs. Fully Insured Plans

Understand how self-funded and level-funded plans differ from traditional fully insured benefit plans in this guide.

 

 

Pros and cons of self-funding

Benefits of self-funding

  • Fewer taxes and fees
    With self-funding, no profit margin is added by the insurance company, and plans are exempt from most state oversight and certain ACA regulations. While self-funded plans are still subject to certain aspects of ACA, such as minimum essential benefits, they are not subject to state-mandated coverage levels for certain benefits, such as chiropractic services. These aspects of self-funded plans lead to savings between 10% and 20% over fully-insured plans. With fully-insured plans, taxes and mandated fees increase proportionately with rising healthcare claims costs. While 2019 was considered a “relief year” from insurer fees, these fees in 2020 are expected to be even higher than the 3.9% they were in 2018, on top of the 2% premium tax. These savings alone average between 5% and 10% (Milliman).

  • Increased benefits of employee education
    Employees can be educated to be smarter healthcare consumers and the employer (not the insurance company) reaps the benefits. When employees know where and when to go for their healthcare needs and are healthier overall due to wellness initiatives, the employer saves money with self-funded plans.

  • Flexibility in plan design
    More creative plan design options to manage costs offer additional employer savings. Employers can shop around for better claims administration and stop-loss premiums, and have much more flexibility in plan design, allowing the creation of a plan that better fits an employer group’s needs.

  • Access to data
    Self-funding provides increased access to claims and utilization data over fully-insured plans where carriers are in control of the data that they report on and provide to employers. With self-funding, clients are able to determine which information they want to access and report on and when. This data can be tailored to tell the employer if their plan is achieving their goals. For example, the employer can run reports to see whether claims have gone down since the implementation of a new wellness program, allowing the employer to see how their efforts are impacting their bottom line.

 

Potential downsides to self-funding

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:

  • Hands-on approach
    Some employers want a “set it and forget it” mentality with their employee benefits plan—self-funding requires the employer to be more engaged than if with a fully-insured plan. When taking on self-funding, the employer must commit to paying closer attention to claims and analyzing both their plan and their results regularly in order to achieve the best impact on their bottom line.

  • Higher-level focus
    Employers can try to control the wrong costs. Self-funding requires employers to look at the big picture, focusing on total spend and trend, and understanding that sometimes growth in one spend bucket is a good thing. For example, increased pharmacy costs due to wellness programs encouraging employees to take medications for chronic conditions is positive long-term. Instead of worrying about something like this, employers should direct their efforts toward larger, controllable costs, like where care is delivered (e.g. incentivizing the use of walk-in clinics or office visits vs. emergency rooms, surgeries in free-standing surgery centers vs. hospital settings, etc.). Rather than worry than employees are taking medications for chronic conditions when they weren’t previously, employers should encourage the use of generics when possible.

  • Stop-loss coverage
    Employers may buy the wrong stop-loss coverage. It is critical to understand whether the stop-loss is on a paid or incurred basis, and how long providers have to file the claim—bigger claims often take longer to file and pay. Gaps between what is offered in the medical plan and what is covered by stop-loss can also lead to additional large, unexpected expenses for employers. Making sure that the stop-loss plans take into account all of the benefits offered to employees and other covered individuals in the language of the plan itself can significantly reduce costs.

  • Results take time
    Losing patience with self-funding is not uncommon. The savings with self-funding don’t happen overnight. While self-funding can positively impact the employer’s bottom line, it does take time—it may take a few years to create a plan that works best for the organization and provides the savings desired. With self-funding, there will be bad years—that’s part of the deal—but in the long run, the good years make up for it. The worst time to stop self-funding is after a bad year.

  • Communication with vendors
    Vendors working in silos can be dangerous. Getting reports from various vendors (TPAs, PBMs, etc.) and being unable to integrate or compile the data in a way that helps improve the plan is counterproductive and can lead to the plan costing more in the long run.

  • Untreated conditions are more expensive long-term
    With plan design flexibility comes the potential possibility of designing a plan that creates barriers to needed care or incentivizes the wrong behaviors. Discouraging care for chronic conditions with extremely high deductibles and out-of-pocket costs can actually lead to excessive claims. Employees and other covered individuals who have chronic conditions they aren’t managing because they can’t afford it are more likely to incur catastrophic claims down the road.
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Getting started with self-funding

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.

Stop-loss coverage

There are two basic kinds of stop-loss coverage:

  • Specific stop-loss protects against catastrophic claim costs on any one individual 
  • Aggregate stop-loss protects against total claims that are higher than expected

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.

Third-party administrator (TPA)

TPAs handle a lot of the behind-the-scenes details of self-funded plans, including:

  • Claims payment and administration
  • Offering assistance with compliance and regulatory support
  • Providing a summary plan description (SPD)
  • Support and provision of broker, employer and enrollee portals to access plan information

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.

Pharmacy benefits manager (PBM)

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:

  • Formulary and pharmacy network management
  • Processing and paying claims for prescription drugs covered under the plan
  • Specialty Drug Management such as prior authorization and supply limits on oral and self-administered prescription drugs, as well as recommending the optimal providers of these drugs

Additional Services

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:

  • Disease management
  • Case management
  • Wellness
  • Concierge services to help beneficiaries choose high-value services
  • Transplant and specialty networks for special care

Choosing the right network

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.

How self-funding differs from other plan types

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To understand self-funding better, it helps to know how this plan type differs from other plan types you may be familiar with.

Self-funded

  • Not purchased from a carrier (i.e. employer pays claims themselves)
  • Highest risk
  • Potential for greater savings than with other plan types
  • Stop-loss insurance protects against catastrophic claims
  • Subject to ERISA (Employee Retirement Income Security Act), meaning plans are subject to regulations related to participant rights and access to plan information. Also subject to elements of ACA.
  • More flexibility in plan design

Level-funded

  • A type of self-funded plan (not purchased from a carrier, the employer pays claims themselves)
  • Monthly payment is fixed (determined by TPA based on risk), making it more predictable than self-funding
  • Medium level of risk
  • Potential for additional savings due to flexibility and lack of state regulation
  • Stop-loss insurance protects against catastrophic claims
  • Subject to ERISA (Employee Retirement Income Security Act), meaning plans are subject to regulations related to participant rights and access to plan information. Also subject to elements of ACA.

  • More flexibility in plan design

Fully-insured

  • Employer pays a fixed annual premium to carrier based on the number of employees enrolled
  • Carrier is responsible for claims payment (with the exception of deductibles and/or coinsurance paid by enrollees)
  • Lowest level of risk
  • Fewer opportunities for savings
  • Subject to ACA, state health insurance regulations/benet mandates, state health insurance premium taxes and ERISA
  • Predictable costs

 

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Digging deeper on level funded plans

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:

  • TPA fees
  • Stop-loss premiums
  • A claims allowance

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.

Learn More or Get Started with Self-Funding


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!