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Self-funding is not a new strategy. But while historically utilized for large employer groups, its availability for medium and small employers is new. And the concept is showing impressive results when it comes to giving employers greater input in health plan design and more control over rising medical benefit costs.
Smart Business spoke with Domenic Pascucci, consultant at JRG Advisors, about the benefits of a self-funded health plan.
Why is control of a health plan so important?
Employers need to focus on where their medical dollars are spent to accurately implement and assess a benefits strategy that stabilizes costs. Employers that cling to their fully insured plan must face the reality that they have no control. They wait until 60 to 90 days from their renewal, hoping for a favorable renewal offer, but they’re often slapped with an increase. And so, the last-minute scramble begins — they modify their plan design, switch insurance companies and shift costs to employees.
These methods are a temporary solution at best. They never serve as a long-term strategy to effectively or efficiently manage an employee benefits program. In a self-insured or self-funded health plan, the employer takes on direct financial responsibility for employees’ health care costs. Rather than being in a large, fully insured risk pool, the self-funding employer takes on the risk for its group.
Why do some employers hesitate to switch?
Self-funding has grown in popularity and proven to save money, but ‘taking on risk’ can be an uncertain and intimidating concept. Many employers are misinformed and hesitate to make the leap from fully insured plans. A Sun Life Financial study found that nearly 50 percent of employers were skeptical of self-funding because of the fear of financial risk and 40 percent were fearful of incurring catastrophic claims.
Most self-funded employers, however, purchase stop-loss insurance to cover catastrophic claims, which protects the employer and caps the financial risk exposure. Furthermore, self-insured health plans are exempt from most state insurance laws and mandates. Not having to pay regular premiums to an insurance company can produce substantial savings. An employer is only paying for claims that actually occur in the self-funded model.
How do employers know if their organization is a good candidate for a self-funded plan?
Self-funding is not the right fit for every employer. Some careful research and analysis should be conducted by an experienced consultant that specializes in this type of funding arrangement. Identifying an employer’s financial situation, risk tolerance, cash flow, historical performance of claims and coverage needs are all factors that will help an employer decide.
What do employers need to know about setting up a self-funded plan?
If employers are viable candidates, their broker should guide and educate them on making the transition. Once an employer is committed to a pre-determined strategy that meets the company’s needs and affordability, a financial model should be developed. It will help identify potential outcome scenarios that will not only reduce the employer’s concerns, but also reduce the risk of incurring a large financial pitfall from a costly claim. Various stop-loss deductibles and their impact should be modeled out.
Once the financial model is set up, the broker can examine plans and benefits to find those that best suit the needs of the employer and employees. This is also a good time to review the responsibilities for managing the cost and affordability of the self-funded plan. To make the transition as smooth as possible, the self-funded plan should be similar to the fully insured plan. Finally, employers need a clear understanding of a third party administrator’s role, the various levels of insurance, network availability and which networks are best suited for them.
What’s the takeaway for employers?
If your goal is to take control of your benefits program and rising costs, it’s worthwhile to examine if self-funding is a solution for you. Seek the guidance of an experienced insurance professional who can provide a detailed analysis of your liability — only then will you be informed and ready to decide whether this strategy is for you.