Should I Seriously Consider Self-Funding or Are There Other Options?
More and more, small to medium sized organizations are choosing to pay out of pocket for employee health claims rather than paying a high fixed monthly premium to an insurance carrier. This strategy is known as self-funded healthcare. Is going this route right for you and your organization? When weighing your options it is important to know the pros and the cons.
5 Benefits of self-funding
- Customized Plans – Self-funded plans have more control over what benefits are offered and what services are covered.
- More Information – Self-funding allows for greater access to claims data, which provides employers a more comprehensive picture of their covered population.
- Cash Management – Payment for coverage does not occur at the beginning of the term, allowing the organization to retain the cash until a claim occurs.
- Avoidance of State Regulations – Self-funded plans are exempt from state insurance regulations due to provisions in the ERISA laws.
- Cost Controls – If actual claim costs are less than expected the organization retains the savings, not the insurance carrier. With the proper claims management systems in place, the potential of annual plan savings is about 3-5%.
For more advantages to going self-funded, check out this article.
5 Cons to self-funding
- Financial Risk/Exposure – In a self-funded plan, the organization now assumes much of the financial risk previously held by the insurance carrier. One specific area of risk is if your organization has relatively few employees to spread the risk between, thus leaving yourself more susceptible to a high cost claim. There are protections you can put in place to assist you in these types of situations, but they do not completely insulate the organization from the risk.
- Unpredictable Cash Flow Needs – There is no way of predicting when one or more high cost claim may come in necessitating greater cash disbursements. The organization should prepare itself for these “rainy day” scenarios.
- Additional Administrative Cost and Involvement – In order to administer a plan properly, your organization would need a third-party administrator (TPA) to assist with the plan. TPA’s help to coordinate all the moving parts of a self-funded plan, but there is a cost for their services.
- Administrative Exposure – The employer is ultimately responsible for the operation of the plan and must follow the myriad of strict rules protecting individual’s health information.
- The Bad Years – Self-funding is a long-term strategy. Not every year is going to be a good year and your organization must recognize the long term benefits of the self-funded plan during these down years. It may very well take several years before the organization sees a return on its investment.
Self-funding definitely is not for everyone. For many, the benefits do not outweigh the cons. The good news is that if you are not ready to take the leap to self-funding, there are new products that carriers are offering to dip your toe in the self-funding waters without taking on all the additional risk. Level Funded or Level premium products are a self-funded hybrid and are growing in popularity. The benefit to moving to this type of arrangement is the transparency, predictable monthly costs and share in potential surplus. For many, this option is more appealing because you can gain insight but do not have to take on all of the additional administrative burden and financial risk.
For more information on Level Funding or Level Premium plans please click here.
If you are interested in learning more about these alternative funding arrangements, please contact us. We also have many satisfied clients who would be willing to share their experience.