Every business owner cringes when he opens the bill for his company’s health insurance. Each year the cost increases while he decreases the benefits to help rein in expenses. It’s like watching a hamster running in a wheel. Nothing changes—employers are frustrated, employees are disappointed and costs keep increasing. When will it ever end?
It will end when business owners change the paradigm. How? With a little education: The typical employee health benefit plan is composed of three parts; claims, administration fee and network fees. An actuary estimates claims at the beginning of the plan year and builds them into a policy whether they are incurred or not during the year. The business pays for them and the accompanying administration.
Depending on the state you are in, if your business has at least five fairly healthy employees there is a better way to design your health insurance program. Self-funding an employee health benefit plan is a smart long-term health strategy to save money because it can provide an excellent opportunity for employers to achieve immediate savings plus sustainable cost control. It unbundles the three parts of health insurance and most importantly allows for only actual claims to be paid. It also doesn’t have to comply with state mandates—only federal ones.
Traditional self-funding is defined as when an employer pays for their own medical claims directly, while a third-party administrator (TPA) administers the health plan by processing the claims, issuing ID cards, handling customer questions and performing other tasks.
Companies with fewer than 250 employees can self-fund but will typically purchase stop-loss insurance. Stop-loss insurance limits the amount of claims expenses. These programs can be offered bundled together through one carrier or unbundled and purchased separately: TPA, Stop/Loss Insurance and Rented Network. The latter gives the employer ability to keep the network but move the insurance if the rate gets too high—or change the administrator is the service doesn’t meet quality standards
While self-insured employee health plans were traditionally deemed a large company benefit, in the last few years several carriers have packaged programs designed for small employers with as few as five employees. Small employee programs make it easy for these companies by keeping premiums level and offering end of the year refunds if premiums paid included more claims than were incurred. There is also a feature to pay for runout claims when the plan is terminated. Typical savings in the first year can be as high as 20 percent and renewals are often more competitive than ACA plans.
Some of the advantages of self-funding are:
- Paying for actual claims instead of estimated claims
- Complying with only federal mandates
- Stop/Loss Insurance to protect from large claims
- Same plan across states
- Claims information showing where claims are from
Smaller employers have been reluctant to self-fund their health benefits due to the misperception that self-funding only works for large companies—though this is no longer true when considering the stop-loss insurance and innovative self-funding options that are available today.
The many advantages of a self-funded health plan—while recognizing key differences from a fully insured health plan—can make this option a smart long-term strategy for clients looking to save money on their employee health plan.
Patti Goldfarb has been specializing in employee benefits for over 20 years. She is the founder of the New York State Association of Health Underwriters and has been on CNBC, quoted in Forbes, Kiplinger’s and MUSA. She can be contacted at email@example.com