The Pros and Cons of Self-Funding Your Health Care Plan
Does the statement “Self-Funding” scare you? Actually, if the term was “Self-Insuring” it should scare you as that implies that you are liable for all claims; but “self-funding” really means that you are simply paying the small front-end claims, capped at the most cost-effective level for your size, locale and industry, and using the most efficient strategies of design, cost and accountability of your health care dollar in ways that have proven successful for thousands of companies .
Will self-funding your organization's health care plan actually reduce costs and improve health care service? In most cases it does, as more than half of U.S. employers already have made the switch. .
Still, self-funding may not be right for every organization. Employers considering a switch from a carrier sponsored fully insured plan (FIP) to a self-funded health plan should carefully consider the pros and cons before making the leap.
Definition of a Self-Funded Plan (SFP):
According to the Self-Insurance Institute of America, Inc., a self-funded group health plan (SFP) is one in which the employer assumes the risk for providing health care benefits to its employees. Actually, the common FIP plan used by most smaller groups already has employers pre-paying the risk as if it were already incurred as an actual claim. In addition, FIP insurance carriers always “pad” the expected claims an additional 25% to cover unforeseen claims, and passes it on to the employer in the FIP premium.
So to summarize, SFP employers:
- pay discounted premiums (IE.: normally 40% - 75% depending on location, size and industry) for agreeing to . . .
- pay front end medical claims of their employee health care plan . . .
- claims that are paid with the money saved on the discounted premiums . . .
- claims which are capped on a per-individual and a per-group basis (much like deductibles and maximum out-of-pocket caps in conventional plans).
According to the 2006 Kaiser Family Foundation Employer Health Benefits Survey, 55% of U.S. companies over 20 employees and 89% of companies over 5,000 employees partially or completely self-fund their health care plans.
David C. Parker, a senior vice president at Meritain Health, a provider of self-funded plans to employer groups, says small employers shouldn't avoid self-funding just because it's less common among their peers. He believes employers self-funding can succeed no matter what their size. "I've seen employers with 20-30 employees do very well."
Surprisingly, SFP’s are less common among employers with under 200 employees even though the advantages are every bit as attractive to those companies, and the risks practically non-existent, if the plan is structured correctly. “The success of smaller companies depends primarily on whether they have retained a knowledgeable benefit consultant to assist them in the design and maintenance of their plan,” says Michael Mohr, President of Benefit Management Consultants, Tucson, AZ.
Benefits of Self-Funded Plans:
Why are self-funded plans appealing to many employers?
- One significant draw is they under only one federal governmental regulatory umbrella, the elimination of state and local regulatory intrusions and the taxes needed to fund them.
- Exemption from such regulations means self-funded employers have more control over the types of benefits they cover and the levels of coverage they offer. Self-funded employers that don't want to cover politically correct agendas (IE., voluntary abortion and related issues), for example, can exclude them from their plans, even though state and/or local government recently mandate such coverage for (FIP) fully insured, state regulated, carrier funded plans.
- For multi-state employers, self-funding allows national plan consistency by eliminating the need for state-by-state compliance, and often, the inconvenience of having to pay several carriers that differ in coverage and cost from state to state.
- Cost savings are another big lure.
- Employers initially save money by eliminating state premium taxes;
- they also save by eliminating overhead and other fees paid to their former insurers;
- they keep all claims’ money, and the use of that money, not spent on claims;
- and, as they pay for only actual claims, they save even more – that amount that the carrier charged for claims not actually incurred, and booked as profit from their FIP plans.
Disadvantages of self-funded plans:
The biggest disadvantages of self-funding are:
- The perceived assumption of unlimited risk. The Employer assumes the first line of risk, and becomes the Plan administrator; but when properly structured, the SFP employer covers any front-end claims’ risk with the discounted premium for taking that risk – hence the term “self-funded” - as claims risks taken by the employer are actually funded with savings on premium. A year that brings large, unanticipated medical claims can appear to be potentially devastating to an employer if the plan is structured without the proper stop-loss coverage purchased from an excess insurance carrier. A properly structured plan includes a ceiling on claims liability on both a per-person (IE., individual stop-loss) and a per-group (IE., aggregate stop-loss) basis. The aggregate stop-loss plus the discounted premium should approximate the cost of a conventional FIC plan.
- Self-funding can appear to make budgeting more difficult because health care outlays will vary from year to year and throughout each year depending on claims each year. However, if one budgets on the conventional FIC plan, employers then know the maximum amount they may need to pay out over a specified period of time. The only surprise should be a good one: the money one gets to keep in the average nine of ten years that one will not incur the maximum claims.
- Another obstacle to self-funding is the perceived need for strong internal administrative skills. While virtually all self-funded organizations use third-party administrators, self-funded employers must still assume plan oversight. Hence, the need to retain a Benefit Consultant who can assist you in your efforts to design and administer the best plan that your money can buy for you and your employees.
Strategies For Success
Employers that think the pros of self-funding may outweigh the cons for their organizations need to take several steps to ensure their self-funding strategy is appropriate and effective.
- First, take control from the insurance carrier. Judging by the more than half of U.S. employers already self-funding part of their health care benefits, self-insurance is an important option for employers to consider. Parker says employers should plan to stay with self-funded plans for at least three to five years to reap benefits. "Organizations approaching self-funding with a long-term perspective are more likely to do well with self-funding. Because claims are cyclical, they owe it to themselves to make a three-to-five year commitment at the outset."
- Second, take advantage of Industry Expertise: You need an experienced Benefit Consultant that works for you (not the insurance carrier or someone else’s Trust) in helping design and manage the Plan, the Stop-Loss Carrier and the Claims Administrator, and in developing accountability and cost control of your plan. By carefully analyzing claims, cash flow, administrative capabilities and coverage goals, a Benefit Consultant can help you determine when the switch to self-funding makes sense and just how you should go about it. The consultant’s fee will be no more – and often less - than the commissions you are paying for your present plan; but he works for you, not the insurance carrier.
- Third, plan design flexibility: Make use of your Benefit Consultant’s expertise in design methods that customize your plan to the best coverage and the most cost-effective use of your healthcare dollar. Self-funded employers purchase stop-loss insurance that provides protection against costly claims. Stop-loss coverage can be triggered by either a high dollar claim or by surpassing a predetermined aggregate claim amount. Under the first, an employer may buy a policy that shifts responsibility for a claim to the carrier once it exceeds a certain dollar amount, such as $10,000 or $20,000. Under the second, the carrier assumes responsibility once the total amount of claims for all employees reaches a specific threshold. Employers need to determine their comfort with different levels of risk, and purchase stop-loss insurance accordingly.
- Fourth, become proactive in reducing claims by investigating preventive options: Rather than simply REACTING when a claim occurs, we must get as far out in front of every claim as we can. By helping our people become healthier, we will lower utilization and decrease catastrophic claims, which translates to lowering plan costs.
Almost every entity involved in providing health care to your plan members is rewarded when their revenues grow – insurance carriers, discount providers, medical service providers, etc. It would be rare if their business models rewarded them when their revenues, i.e. YOUR COSTS, went down. The only way to change this reality is to control the entry of your employees into the conventional revenue stream by offering proactive medical assessment and prevention, or intervention, in the earliest stages of diagnoses. This moves your people from high-risk to low-risk, in an effort to get ahead of the catastrophic claims, limiting the potentially catastrophic levels of money spent on these claims.
The fact is that if we look at who is spending your plan dollars (IE., claimants) we will see that 15% of your people are accounting for 85% of your plan costs; and, in fact, 1% are responsible for 35% of those costs! The longer a person is covered by your plan, the more likely their health will change from being lower risk to higher risk. Typically we rely upon health care delivery and payment systems that have been created to react to, and care for, people when their bodies no longer function the way they should. Bottom line: your current health plan waits until there is a serious issue then throws money at it.
We improve members’ health by:
- assessing personal health risk by gathering personal and family histories of each employee along with height, weight, blood pressure and blood test results;
- identifying potential risk factors and reducing them through tailored lifestyle education and incentive programs.
For example, by putting a Doctor on site you can reduce your present plan costs by 20%+ each year. Results: Employees love it and catastrophic claims are reduced by as much as 50% in the first 3 years.
Our goal is to lower the demand for catastrophic health care services (IE., major claims) so that your plan has little or no increase in costs year after year. We do this by focusing proactively on the members who are most likely to have claims – both the employee and the dependents. We work with each insured to create programs that help the members who will benefit the most.
This is a Win – Win program! We help you lower your costs by reducing your member’s future demand for health care; and employee’s experience better health, preventive and earlier intervention and a much better quality of health care.