Business owners need to look after their employees, and part of that is providing good health coverage. When starting your search for a plan, however, the variety of options available could leave you overwhelmed. What option is the most cost-effective, giving you the most coverage for your dollar? The answer for your business could be a self-funded option.
Some employers might not even know self-funding is an option, opting instead for a traditional fully-insured plan that could end up costing them more down the line. Here, we’ll go over just what self-funded employee healthcare means, and some of the ways it can save you money.
Self-funding is when the employer assumes financial responsibility for the costs of healthcare claims incurred by their employees. Instead of a fixed premium paid to an insurance provider every month, employers collect a premium from their employees and earmark that money for medical expenses. This money is usually set up as a trust, and employers also contribute funds. If no or few employees file claims, this reduces employee health insurance costs.
Instead of insurance companies, self-funded plans rely on third-party administrators (TPAs) to process insurance claims. TPAs can also handle:
Until recently, it was mostly larger businesses with 1,000 employees or more that took the self-funded option, as they were financially solvent enough to assume the risk of large healthcare costs. However the market has changed, and now the cost of fully-funded plans for some employers have raised making self-funded plans more obtainable.
With self-funded plans, employers pay certain fixed costs per month, while other costs vary depending on the amount of coverage employees use at a time. Overall, this can result in lower healthcare costs for the business owner than those of a traditional plan. As of 2018, over 38% of private sector businesses were offering at least one self-funded healthcare plan, according to the Employee Benefits Research Institute (EBRI).
While it has lower employee insurance costs, self-funding also carries a higher risk since you’re assuming the liability for insurance costs that a provider would normally take on. Many employers worry about what would happen if they self-fund and encounter an unforeseen, catastrophic claim. To protect themselves, self-funded employers often buy stop-loss insurance. Stop-loss coverage pays the employee’s medical costs when they top a certain predetermined amount.
Now that we know what self-funded coverage is, let’s look at how it could save you some money. In addition to being cost-effective, self-funding also allows for greater flexibility in the type of plan you use, as it can be tailored to your employees. That brings us to our first point:
Traditional, fully-insured plans are considered a one-size-fits-all option. With self-funded plans, you can design your employees’ healthcare coverage based on their needs, so you don’t end up paying for coverage you know you won’t use.
Employers also aren’t required to pre-pay for coverage the way they would with a traditional plan, and they retain control of the invested funds instead of the insurance provider. That lets them maximize their interest income from their healthcare trust.
Depending on the needs of your employees, you can offer options like free generic prescriptions, mail-order prescription services, and other benefits. You can choose from a range of wellness options like screenings, checkups, and chronic disease management as well, choosing only what your employees need and will use. You aren’t required to contract with a certain provider if they don’t offer the right coverage.
Self-funded healthcare plans are also experience rated, meaning risk is calculated based on the individuals actually covered under the plan. Traditional healthcare plans are community rated, meaning the entire demographic gets lumped together and a premium charge is dictated based on the entire group’s statistical risk.
If your employees don’t file any claims—or file fewer than anticipated—that money goes back into the business’s pocket. Instead of paying a lump sum upfront the way you would with a traditional plan, payments to cover healthcare expenses are doled out as needed. That gives greater control of cash flow to the business owner and a higher possibility of saving money since the cost of providing benefits to employees can be lower than a traditional plan.
Self-funded healthcare plans aren’t subject to tax liability payments on premiums. Premium tax is typically 2 to 3% of the total premium cost, and an insurance company includes that cost in the premiums that it charges. By self-funding, you avoid paying the company’s premium tax, and you end up saving that same amount of money. With a self-funded plan, tax on premiums is typically only collected with excess loss coverage, and that amount is usually very small.
If you choose to go with a self-funded plan, you’ll also be exempt from the charges insurance providers place on traditional plans, such as retention charges and risk charges.
The advantages of self-funded health plans can be plentiful, but you should be mindful of the cost. If you think you can cover the costs of typical claims as well as stop-loss insurance, then a self funded plan could be the right choice for you. The lack of taxes as well as exemption from some regulations will put more money back into the business when it comes to healthcare costs.
When making your decision, you should keep in mind that self-funded insurance plans are required to adhere to certain regulations, including:
With a little extra work, a self-funded healthcare plan could be the best thing for you and your employees. To learn more about a self-funded plan or to get one started for your business, contact an RMC health specialist today.
