Which funding arrangement is better — self-funded or fully insured? At some point, every employer with group insurance asks this prudent and assertive question. With costs of medical benefits continuing to increase at multiples of the Consumer Price Index, more employers are asking this question.
The problem with self-funding is that most employers are not educated enough before entering self-funded plans. To compound the problem, getting out of a self-funded plan can be difficult. Employers interested in self-funding should take a class or read a few books before entering into these arrangements.
A word of warning: Do not rely on your agent alone. Get written information and read all disclosures. Self-funded plans in the wrong hands can be like giving a monkey a loaded gun.
Before we can answer the question, we need to pick a specific benefit. Short-term disability, dental and vision as well as medical plans are candidates for self-funding. Although most people think of medical benefits, there can be advantages to self-funding other benefits as well.
For this review, we will pick medical benefits. And for you purists, when we mention self-funding, we really mean partially self-funded. Reinsurance is prudent regardless of the size of the group.
The answer to the original question is, “It depends.” Both are clear winners in their respective environments. It is difficult to give all the support data in this short article, so let’s tackle the big question of “Which plan costs less?”
Here are the facts we need on the table.
1. Self-funded plans have more liability than fully insured plans.
2. Self-funded plans are less aggressive than fully insured plans.
3. Claims are fairly predictable but not guaranteed.
4. The name of the game is shifting risk to someone else.
Self-funded plans have more liability; if they didn’t, everyone would be self-funded. If you get a fully insured rate from a carrier and then ask for a self-funded quote, the liability on the self-funded plan will be about 20 percent to 25 percent greater.
Under fully insured plans, the insurance carrier has a greater opportunity to win than with self-funding. Under fully insured plans, if claims come in less than expected, the insurance carrier keeps the savings. Under a self-funded plan, if claims come in less than expected, the employer keeps the savings. Conversely, if the insurance carrier’s opportunity to win is substantially less under self-funding, then its tolerance for risk is equally low.
This is the reason fully insured carriers can get more aggressive than self-funded.
Claims are predictable. We believe in actuarial forecasts because we have seen them to be true more often than not year after year after year. The accuracy of predicting claims can be spooky, but that is why the actuary industry is still around after hundreds of years.
The name of the game is to shift risk. Being self-funded is not shifting much risk. Consultants who love self-funding will argue that claims are claims, so just understand them and try to control them using different methods. Although that is true, it is also incomplete.
If you perform accurate actuarial forecasts of your claims and total costs, then find someone who is willing to take more of that risk, you should let them have it.
In the example in the chart above, the ultimate question is, do you want to lock in a savings of $64,000 or risk paying either more or substantially more ($150,000 in this example) in order to have the “potential” for your claims to come in less than the fully insured rates?
Some optimists want to shake the bones and roll the dice. The optimist may be correct, but no one will know until after the fact.
So when do self-funded plans dominate?
They are the primary funding arrangement in large, multilocation employers that want to keep a consistent benefit in all locations while picking the best regional PPO network. In that third-party administrator environment, they are almost impossible to beat.
Bruce Bishop ([email protected]) is director of marketing and managing partner of KYBA Benefits. KYBA Benefits provides consulting and administrative services to more than 400 corporate accounts, ranging in size from 20 employees to more than 7,000. Reach Bishop at (770) 425-6700 or (800) 874-2244, ext. 205.