Self-Funded or self-insured employee health benefits plans are gaining more traction with business owners. Self-funded insurance plans can help a business save the money they would normally spend on premiums at the cost of predictability of expenses paid toward insurance. For most businesses, employee benefits costs are their second biggest expense.
To understand what a self-funded plan looks like it is important to understand what the opposite of self-funded plans are.
Traditional Model of Insurance Coverage
Fully funded, max funded, or fully insured all refer to the traditional model of business insurance. In this model an employer pays an insurance carrier a premium set by the carrier. The carrier in return offers health insurance to all the employer’s eligible staff. When there are claims covered by the policy, they are dealt with by the carrier after employees pay their deductible.
The traditional model of insurance coverage (fully funded) operates the same for an employer buying group coverage as it does for an individual buying home insurance. Pay the premium when scheduled and all incurred costs, with the exception of deductibles and co-pays, are the responsibility of the insurance carrier.
What is a Self-Funded Plan
Self-funded plans use third party administrators to pay for claims and associated fees through their available assets. Essentially, the business is responsible for what the insurance company would be contracted to do in a traditional insurance model.
For example, say you have an employee that sprains their back while at work. The employee then seeks medical attention for the injury. They have, in essence, filed a claim. The claim results in a total charge of $50,000. There is a deductible of $5,000.
In a traditional insurance model, there would be no effect on your company other than a potential rise in your premium for the next policy period. The insurance carrier would then pay the $45,000 for the claim.
With a self-funded plan, the employer pays for the claim “out-of-pocket”. Typically, a company will set aside a specific amount of money to pay for claims as they come. In return, the company does not have to pay for premiums. In the example, the $50,000 would be paid by your company. Having planned ahead and having the extra cashflow from not having to pay premiums means you are able to cover the cost of the claim.
Advantages of Self-Funded Plans
The money that would normally be spent on monthly premiums is saved by the company. Traditional model of insurance = premium, self-funded = no premium.
Self-funding can create lower premium costs for employees on average. Employees will appreciate the extra money on their paychecks.
If there are less claims, you save money. More claims means that the fixed cost of insurance premiums may be a better option than self-funding.
More flexibility than fully insured. One size does not fit all. Fully insured is a one size approach. Self-funded plans allow a business to customize their insurance policy options to best fit their specific needs. Employers using self-funded plans can often choose employee eligibility as well as covered benefits and exclusions. If you know what your workforce wants you can craft a benefits plan that will appeal to them over the polices offered by the carrier.
Self-funded plans do not have to comply with every state regulation that traditional insurance plans do. Governmental mandates as well as some aspects of the Affordable Care Act do not apply to self-funded employee benefits plans.
Self-funded offers more data about your insurance plan and your employees’ use of it. This data can be used to make more educated decisions about providing employee benefits in the future. Create policies that appeal to your workforce to create greater job satisfaction among your employees.
Disadvantages of Self-Funded Plans
Self-funded plans are not viable for companies that do not have the available assets set aside to pay for claims. Small businesses with limited amounts of cash flow will find that self-insurance is not a viable option.
Getting hit with a massive bill, such as an employee being involved in a serious accident, can create a massive financial strain on the business. This strain can be fatal for a business if they are not properly prepared.
Insurance costs fluctuate more due to having to pay claims as they come in. Especially if one of those claims is a catastrophic claim that the company did not expect.
Fully funded plans offer financial safety (incurred a claim that is larger than you can pay) and predictability (premium is a fixed cost vs claims are not). There is a higher level of risk that companies take on when self-insured.
Small businesses can get some of the benefits of self-insured plans, but only larger businesses will see the full benefit of these plans.
Third party administrators can be less expensive then the insurance company processing the policy however, they may also charge additional fees for their services. For example, if you also want to add stop loss insurance, the administrative fees may off-set the potential savings of self-insuring.
Stop Loss Insurance
While these disadvantages need to be considered when shopping for self-funded insurance plans, there is an insurance coverage option that can help employers mitigate some of these risks. This option is call stop loss insurance.
Stop loss insurance is put in place to help business owners that have experienced a catastrophic claim that they are financial unequipped to handle. Many small business owners are wary of entering into a self-funded insurance plan due to what they perceive is a lack of protection from exuberate claims that they cannot pay for.
However, stop-loss insurance can help protect these business owners from a claim that would otherwise bankrupt them.
Stop loss insurance acts as a safety net that only applies if the claim cost reaches an amount specified in the policy. Stop-loss insurance acts just like an umbrella policy for your home and auto coverage.
There is a maximum amount specified in your insurance policy. If your company experiences a claim that goes over this maximum amount, stop loss insurance kicks in to help you deal with the expenses.
Just like an umbrella policy stop-loss insurance requires the foresight and planning to know that you will need this type of coverage.
Considering a self-funded plan for your company’s employee benefits but not sure if it is right for you? Not sure if you are fully equipped to handle any and all claims that come your way? Contact us at Konen Insurance and we can help you find the option that best suits your business’ needs.