Self-funded insurance: As the benefits become evident, more companies choose local control

Today’s business climate calls for unique and cutting-edge employee benefits solutions. Pre-packaged medical plans do not always offer the greatest value. Employers of all sizes are looking to customize their plans around the requirements of their business, which has led to an increased interest in self-funding.

The nonpartisan organization Employee Benefit Research Institute reported that about 59 percent of private sector workers with health insurance coverage were in self-insured plans in 2011, a significant increase from the 1998 incidence of 41 percent.

“Unlike a traditional fully insured medical plan under which the insurance company assumes the financial and legal risk of loss in exchange for a fixed premium paid by the employer, a self-funded or self-insured plan enables the employer to eliminate obligations to an insurance company by assigning the financial risk for providing health care benefits directly to its employees,” says Amy Broadbent, vice president, JRG Advisors.

Smart Business spoke with Broadbent about self-funded insurance plans and stop-loss insurance.

How can a company benefit by offering a self-funded insurance plan?

The advantages of self-funding include reduced overhead costs, reduced state premium taxes, exemption from state mandated benefits, flexibility in plan design and customizable stop-loss insurance to reduce the risk associated with high claims.

In addition, self-funded insurance provides the opportunity for improved cash flow as a result of a company not having to pre-pay for coverage (instead, claims are paid as they are incurred) and possible additional cash flow if reserves are held in an interest-bearing account.

Most self-funded insurers offer stop-loss insurance to reduce the risk associated with large individual claims or high claims from the entire plan. The employer self-insures up to the stop loss attachment point, which is the dollar amount above which the stop-loss carrier will reimburse claims.

What types of stop-loss insurance are there?

Stop-loss insurance comes in two forms. ‘Individual/Specific’ stop loss protects the employer against large individual health care claims and limits the amount the employer must pay for each individual. For example, an employer with a specific stop-loss attachment point of $25,000 would be responsible for the first $25,000 in claims for each individual plan participant each year. Any claims for a specific individual in excess of $25,000 would be paid by the stop-loss insurer.

‘Aggregate’ stop-loss insurance protects the employer against high total claims for the entire health care plan. For instance, aggregate stop loss with an attachment of $500,000 would begin paying for claims after the plan’s overall claims exceeded $500,000. Any amounts paid by a specific stop-loss policy for the same plan would not count toward the aggregate attachment point.

Self-funded insurance serves as an important financial backstop for the employer if, for instance, an employee will need major medical attention, such as being diagnosed with cancer, needing an organ transplant or has a premature baby requiring intensive care.

What are some examples how fully funded plans differ from self-funded plans?

Let’s say ABC Co. is fully insured and pays an annual premium of $1.5 million for its health insurance plan. Claims experience shows that ABC only had $1 million in claims and administrative expenses. The fully-insured carrier realizes $500,000 in profits.

On the other hand, let’s say ABC’s group health insurance is self-funded. ABC’s potential worst-case scenario for the year is $1.6 million. ABC pays $20,000 a month as a fixed premium and has a reserve of $1.36 million for potential claims that is the company’s to use as it sees fit until claims are filed. At the end of the year, the company’s claims are $1 million. It retains the $360,000 it reserved in the event of a worst-case scenario. ABC realizes a savings by going self-funded versus fully-insured.

Employers should consult with their benefits advisor to learn more and determine if self-insuring is the right option for them.

Insights Employee Benefits is brought to you by JRG Advisors