What is self-funding and why do companies use it?

Self-funding could play an integral role in helping lower employer health care costs.

What is self-funding?

Self-insurance, or a self-funding plan, is when the employer pays for employee health care costs out-of-pocket, as opposed to paying a predetermined premium to an insurance provider. To cover these costs, a self-insured employer will typically set up a special trust fund to earmark money to pay incurred claims. These funds are collected through both corporate and employee contributions. 

With self-funding, employers rely on third-party administrators (TPAs) to process claims on their behalf. TPAs are generally more flexible, transparent and responsive than their fully-insured peers. With access to robust sets of employee health data, a TPA’s job to help employers realize cost-savings by maintaining a consultative relationship with their clients.

Compared to traditional plans, self-funding is really just a change in the financing mechanisms for a company. With self-funding, costs are broken down into two components: fixed and variable. If the company ends the year with fewer variable costs than fixed costs, that money will stay with the organization.

Why switch to self-funding?

There is no shortage of reasons to switch to a self-funded plan. The benefits range from cost savings to providing employees with a more tailored health care plan.
  • 1.  The Opportunity to Save

    Self-funding gives companies the flexibility to manage the challenges of employee health-care benefits allowing them to better manage costs. By working with TPAs, employers health plans are actively managed based on the employers specifications instead of in accordance with an insurance carrier’s policy.

  • 2.  Flexibility of Plan Design

    Employers are able to move away from a one-size-fits-all approach and instead focus on introducing a plan that meets the specific health care needs of their workforce. Instead of being boxed in to plan options provided by an insurance carrier, employers can work directly with their TPA to create a custom plan for their healthcare requirements and can adjust their solution over time as needed. 

  • 3.  Change in Tax Requirements

    The employer is not subject to conflicting state health insurance regulations/benefit mandates, as self-insured health plans are regulated under federal law (ERISA). With the reduction in premiums, employers often benefit from cost savings since health insurance premium taxes typically account for 2-3% of the premium’s dollar value.

  • 4.  Increased Transparency with the Availability of Data

    Beyond the cost of salaries for employees, the cost of insurance is likely the second or third largest company expense. Without sufficient data, companies lack the information needed to make smart decisions around this large business expense. By introducing more data and increasing transparency, employers can plan more effectively and make better business decisions regarding cash flow.

Is self-funding always a good fit?

Self-funded plans are not for everyone. With self-funding, employers assume the risk of paying the health-care claim costs for its employees. Given limited cash flow, smaller companies may find that self-funding is not an option because they must remain flexible to meet the financial obligations, which are often unpredictable. To help mitigate this risk, businesses rely on stop-loss insurance. Stop-loss insurance reimburses employers for claims above a specific dollar amount. 

It should be mentioned that there are plenty of smaller companies that function extremely well on a self-funded plan. To make the best decision for a specific business, it’s important to understand the health care goals of the company and the self-funded options available. 

How does this shift perspective on employee health and wellness?

With self-funded plans, employee wellness is not something to be taken lightly. Encouraging healthy behaviors in employees is essential to any modern-day wellness solution and a healthy team will result in lower healthcare costs for the organization and the employees. This in turn will help companies attract top talent, improve job satisfaction, productivity, and retention.

Preventing health issues is less expensive and more effective than reacting to health care costs after the fact. Combine a robust wellness offering with an insurance plan that best suits the company and the and it’ll have a positive impact on the company’s bottom-line.

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