Choosing the appropriate healthcare plan for your company is a large and important investment. You might find yourself confused by the myriad of options for structuring your employee health benefits plans, but with the right benefits partner and the right plan, a self-funded benefits plan can save your company money and provide better claims data analysis to track your actual utilization. Read on for the basics of self-funded benefits plans- what they are, how they are set up, and how they can benefit your company.

What is a self-funded benefit plan?

A self-funded benefits plan, or self-funded insurance, is a policy where your company assumes financial responsibility for employees’ and their dependents’ covered healthcare expenses. Under this arrangement, the employer pays the claims as they arise instead of paying monthly premiums as with a fully insured benefit plan.

Costs associated with self-funded policies include monthly fixed costs paid to a third-party administrator (TPA) or insurance company. Fixed costs may include fees for administering claims, network access fees, and stop-loss insurance. The bigger portion of monthly costs is the actual medical claims which are being billed to the employer on a monthly basis.

How do self-funded plans work?

Self-funded health plans are typically administered by Third Party Administrators (TPAs) to process claims on the company’s behalf as well as provide additional services like collecting premiums and contracting for provider network services. Employers may opt to handle healthcare claims in-house or contract them out to a TPA or benefits broker. Most employers who choose to self-fund will set up a special trust fund or account to place money in reserve to cover healthcare claims as they arise.

With a traditional, fully insured plan, the insurance company assumes all the financial and legal risk of loss in exchange for a fixed premium paid by the employer. Since self-funded plans shift the risk of claims payment to the employer, many smaller companies avoid them. Smaller companies are typically less able to manage the variance in cash flow associated with a self-funded plan.

To reduce the risk of cash flow variances associated with catastrophic claims, companies with self-funded policies may choose individual stop-loss and/or aggregate stop-loss insurance for these claims. Stop-loss insurance can make self-funding a more viable solution for smaller companies who prefer less risk.

Pros of Self-Funded Policies

Self-insurance can offer more flexibility in benefit design, greater transparency in claims utilization and overall savings when compared to fully insured policies. In many cases, certain state requirements may not apply as well as premium taxes applied to fully insured policies.

Flexibility and Control

Self-funded health insurance allows for more flexibility and control over terms. With self-funding insurance, employers have the opportunity to work directly with a TPA to custom design benefits and have more control over selecting, monitoring, and coordinating their plan vendors. You can choose healthcare solutions that fit your needs, and those of your employees, and adjust them over time as needed.

Cash Flow and Cost Savings

Increased cash flow is quickly becoming a top priority for many employers. Unfortunately, traditional health insurance plans can pose challenges to achieving this goal because they require monthly premiums from the employer before any claims are paid out. For companies who know their employee base is average to healthier than average, the opportunity for significant savings exists over a comparable fully-insured plan. Self-funded policies are also not required to pay state premium taxes and are not subject to state insurance laws and mandates which can result in significant cost savings overall. And finally, if claims are lower than expected for a given year, the employer has access to those funds.

Easier Access to Data

Self-funded policies offer easier access to data on plan usage which can be used to identify trends and opportunities for cost savings. And because self-funded plans are customizable and not as regulated, it’s easier to change what you want in your health insurance coverage without having a negative effect on other employees’ benefits like taxes or waiting periods. This means that small companies can benefit from these changes by saving money while still providing comprehensive healthcare coverage at an affordable price! On average, companies who choose to self-fund enjoy a savings of nearly 20% on their healthcare costs, which can leave money left over for new equipment and increases to staff salaries.

For both big and small businesses, making the switch from traditional insurance to a self-funded plan can have many advantages. With greater flexibility and money-saving benefits, we’re seeing more and more companies make the switch, but it doesn’t come without risks. In our next blog post, we’ll discuss the drawbacks and risks of self-funding so you have the information you need to make a solid decision.