Self Funding 101

Self Funding 101 – The Basics

Employers of nearly any size can reduce their overall costs of employee benefits plan with self-funding. We’ll cover just the basic concept here.

Instead of paying high premiums to an insurance company each month, regardless of any health care claims employees may or may not incur, you pay the actual cost of your employees’ incurred expenses.

Fully Funded Benefits

With traditional, fully funded health benefits the employer pays a health insurance provider a set premium amount every month, determined by the number of covered employees and the chosen plan design. The insurance provider pays whatever claims may have been incurred each month, and keeps whatever dollars are “left over”. While the health insurance provider assumes all the risk of high claims cost they also keep any unused benefits so have a financial advantage when claim costs are low.

Self-Funded Benefits

In a self-funded arrangement, you pay only for health care claims that were actually incurred for the period. You assume the risk for potential high claims costs but when claims costs are low, you save what would otherwise be paid in premium to an insurance company.

Rather than engaging directly with a health insurance carrier, you instead purchase Third Party Administration services (also known as Administrative Services Only). The TPA provides all the same services a health insurer would, such as enrolling members, auditing and paying claims, health & wellness services, case and disease management and so on. The TPA manages all of the details.

Part of what you purchase includes Stop Loss Insurance to protect yourself from high claims costs. Stop loss is simply that – your loss (payout on claims) stops at a certain point. Stop loss levels can be set for each covered individual (specific stop loss) and/or for the entire covered group (aggregate stop loss).

The math: Employers can typically save money by being self-funded.  Actual claims costs plus TPA services and stop loss insurance, plus freedom from some federal and state regulations*, results in lower monthly and long-term costs than those of fully-funded premiums.

*Self-funded employers are:

• Able to set any maximum deductible they wish
• Are free from community rating
• Not required to provide coverage with minimum essential benefits
• Not required to participate in a risk-adjustment system
• Not subject to provisions such as medical loss ratio requirements or premium increases.
  The medical loss ratio or MLR requires fully insured plans to spend 80-85 percent of every incoming dollar on claims, limiting profits and administrative costs to 15-20 percent.

Historically self-funding has been most effective for large employers but with the continuing rising cost of health care, self-funding has become an attractive and viable option for small employers.