Self Funded Insurance

As healthcare costs continue to rise, employers are exploring innovative ways to gain control over their health insurance plans. One crucial step many are taking is transitioning to a self-funded (or self-insured) health insurance plan.

What Is Self-Funded Insurance?

The biggest difference between a self-funded and a fully-insured health plan lies in how they are financed.

• In a fully-insured plan, employers pay a fixed premium each month, and the insurance carrier assumes the financial risk by paying claims.
  
  
• In a self-funded plan, the employer funds claims as they are incurred, creating a variable cost structure. While this may sound risky, individual stop-loss insurance is typically included to protect against high-cost claims and aggregate stop-loss insurance is typically included (in general for employers under 500 lives), providing an employer with a financial worst-case scenario.
  
  

Key Components of a Self-Funded Health Plan

A self-funded plan consists of several core elements:

1. Claims Funding: The employer pays claims as they occur, with funds typically withdrawn weekly to pay healthcare providers.
2. Stop-Loss Insurance: This provides financial protection against catastrophic claims and is usually charged on a per-employee-per-month (PEPM) basis.
3. Third-Party Administrator (TPA): A TPA handles claims processing, access to provider networks, and administrative functions, with fees also charged on a PEPM basis.
   
   

Why Employers Choose Self-Funding

The primary reason employers opt for self-funding is the potential for cost savings.

• When claims perform well, employers benefit from improved cash flow, keeping surplus funds instead of the carrier profiting.
• The real advantage comes from implementing strategies that lower costs, such as:
  1. Reducing unnecessary healthcare utilization.
  2. Negotiating lower prices for healthcare services.
  3. Eliminating preventable claims through proactive measures.

With self-funding, employers have greater access to data and can make informed decisions based on actual claims and utilization trends—something that’s difficult with fully-insured plans.

Additional Advantages of Self-Funding

Beyond cost control, self-funding provides employers with:

• Customized Plan Design: Employers can tailor deductibles, co-insurance levels, and benefit offerings to better meet employee needs.
• Regulatory Flexibility: Self-funded plans are governed by federal law (ERISA), exempting them from costly state-mandated benefits.
• Plan Structure Control: Employers can assemble a customized team of partners, such as selecting a TPA, a non-carrier-owned pharmacy benefit manager (PBM), and other innovative solutions based on claim data insights.

While self-funding requires more involvement than fully-insured plans, partnering with the right TPA and broker can significantly reduce the employer’s administrative burdens.

Is Self-Funding Right for my Company?

Self-funding isn’t a one-size-fits-all solution. Several factors should be considered to determine if it’s the right fit:

1. Company Size:
   • Many states require a minimum number of enrolled employees (often 50+) for stop-loss insurance.
   • Larger groups benefit from the “law of large numbers,” which allows for better predictability of future claims. Smaller groups may face conservative underwriting, making self-funding less viable.
2. Risk Tolerance:
   • With variable costs comes financial risk. Employers must evaluate their ability to handle fluctuating expenses and their appetite for risk.
3. Suitability:
   • Certain demographics and known high-cost claims may make an employer a less ideal candidate for self-funding. Conducting a thorough analysis is crucial before making the switch.
     
     

Conclusion

Self-funded insurance offers employers a powerful way to take control of their healthcare costs, tailor benefits, and potentially achieve significant savings. However, it comes with complexities and risks that require careful planning. In my opinion, if you have at least 50 employees enrolled in your health insurance plan and are interested in this model, you should investigate it to determine if you are a good candidate. Once you get past 100 employees enrolled on your health insurance plan, you should seriously consider it. I would just recommend that you work with a knowledgeable consultant who can help you build it and include the right partners within it. You want someone with experience, not someone who is doing it for the first time.

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