Getting the Benefits of Self-Funding without the Risks

There are typically two approaches to securing health coverage for your staff – group health insurance or self-funding. But, self-funding can be costly and risky and is usually only done by larger organizations with thousands of employees. However, there is a hybrid model that can help small and mid-sized employers provide their staff with affordable health coverage: partial self-insuring.

In a fully self-insured plan, the employer pays the cost incurred under the plan for claims and administration. The employer will usually contract with a third-party administrator or an insurance company to process claims and provide access to a network of physicians and other health care providers. Partially self-insured arrangements provide some of the benefits of being self-funded, without all the risks.

How it Works

• Employers and their employees still pay premiums, a portion of which goes into an account that will be tapped to pay the first portion of claims that are filed.
• The other portion of the premium is paid to an insurance company. This is sometimes known as a stop-loss policy.
• Plans have an aggregate deductible for all claims filed by employees, meaning that once that deductible is reached an insurer starts paying the claims instead.
• Premiums are calculated to fund the claims fund to the aggregate deductible amount.
• If claims are lower than expected, the employer can receive a refund at the end of the policy year or use it for the next year.

Lower risk than fully self-insured plan

Typically, an employer should have at least 25 workers if it is considering a partial self-funded arrangement, but we’ve seen plans with fewer enrollees. Many employers will opt for a partially self-insured plan to save money, but these types of plans also allow the employer to design a more useful and valuable plan for their workers.

The key to making this work is cost controls, without which claims can spiral and drive up premiums at renewal. Also, knowing exactly how much to set aside for reserves and how much you should set your employees’ premiums, deductibles and other cost-sharing, can be complicated. With the right mixture of benefits, plan design and education you control behavior, which drives claims, in order to keep renewal rates from increasing too much each year.

The fine print

There are some reasons partial self-insuring is not for all employers:

• There is additional responsibility as the employer basically becomes an insurer or sorts.
• There is additional paperwork for these plans since the employer also becomes a payer.
• There are compliance issues that the employer needs to consider (ERISA and the Affordable Care Act, for example).
• There is some added risk to employers since they are paying claims.
• If you have too many claims, you could face a non-renewal by your stop-loss insurer. If you are cancelled, it may be difficult to seamlessly enter the insured market.