How organizations can benefit from self-funding employee health plans

How to fund health benefits is a major decision for any organization. There are two options — get fully insured through a health insurance carrier or fund it themselves. Until recently, self-funding was only considered for large organizations due to the potential risk involved, but that’s changing.

In fact, according to Pricewaterhouse Cooper’s 2015 Health and Well-being Touchstone Survey, 66 percent of employers with 500 to 1,000 employees are now self-funding their health benefits. That’s up 7 percent from the previous year and up 11 percent compared with 2013.

“Self-funding can be a very effective way for some businesses to control the cost of health care,” says Amber Hulme, Medical Mutual vice president of Central and Southern Ohio. “But it’s definitely not for everyone. Organizations need to evaluate their options carefully to make the right decision.”

Smart Business spoke with Hulme about the basics of self-funded health plans, how organizations might benefit from the approach, and what factors need to be considered before making a switch.

Why has self-funding grown recently?

A decade ago, self-funding was primarily utilized by employers with at least 500 employees. Now, more insurance carriers, including Medical Mutual, have introduced self-funded products for organizations with as few as 50 employees.

In 2018, many small businesses are scheduled to lose the transitional or ‘grandmothered’ status that has kept them exempt from some aspects of the Affordable Care Act. In preparation, even businesses with as few as 10 employees are evaluating the benefits of self-funding.

How does it generally work?

With self-funding, organizations budget for and pay the claims for all employees covered by the plan and any covered dependents, plus administrative fees. Most employers also pay for stop-loss insurance, which limits risk when one employee has a catastrophic claim, as well as when claims for the entire organization are higher than a set amount.

It’s basically the alternative to being fully insured, where the insurance carrier charges a premium and pays the claims — thereby assuming all the risk.

What are the benefits?

Organizations usually decide to be self-funded because it lets them predict costs based on their specific claims history and make any necessary adjustments. If claims are lower than expected, they can invest that money in the business or offer incentives for employee wellness. If claims are higher, their stop-loss insurance can cover it.

There also can be tax advantages to self-funding. Under health care reform, there are certain taxes related to risk that only apply to fully insured health plans. By moving to self-funding, organizations hope to eliminate some of those taxes from their budget.

When isn’t self-funding a good option?

Self-funding introduces more risk, so it’s usually geared toward organizations with more predictable claims. That’s why organizations need to be familiar with their claims history and understand the overall health of their employees when they are making this decision. If the population is relatively unhealthy, for example, self-funding might be a challenge.

Another important factor to think about is their financial flexibility. Some organizations simply don’t have the cash flow available to cover unexpected claims if they come up. Others may need to know their costs ahead of time, and prefer the predictability of being fully insured.

What other factors should be considered?

Self-funding isn’t a short-term solution. It requires a full commitment and a long-term strategy. To actually control costs through self-funding, organizations need to manage their claims effectively. That means committing to keeping their employees healthy through wellness and disease management programs, as well as negotiating with health care providers.

It’s also critical for organizations to know exactly what’s in their contract — and to work with an insurance carrier or a third-party administrator they can trust.

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