By Morris Brooks, Head of Office - Midland
Large companies have long viewed self-funded healthcare plans as a viable option for employer-sponsored benefits offerings. They have the resources to navigate the ups and downs of claims and cash flow, and a large enough employee population to generate robust data analytics to predict future claims utilization. Small and mid-size businesses, however, have been reticent to take the plunge, opting instead to stick with the tried and true model of a fully insured plan. But the tides are changing. Thanks to the increased availability of level-funding premium options and predictive modeling tools, even businesses with as few as a dozen employees can benefit from the advantages of a self-funded plan.
Then and Now
Fully insured plans offer the benefit of security, which is paramount to SMBs that often have little financial wiggle room. The insurance carrier assumes all the risk, regardless of how bad claims are in any given year, and the monthly premium stays constant, so the employer knows exactly what to budget. The downside is that businesses are stuck with ever-increasing rates and limited plan designs, both of which affect the bottom line.
Fortunately, more insurance companies now are offering level-funded premium options, a form of self-funded, for employers with less than 50 employees, which make it easier for employers to plan their benefits budget while providing greater plan design flexibility. With a level funded plan, the employer pays a fixed sum just as if he was fully insured to cover anticipated claim expenses and insurance costs, and receives a credit or refund at year-end if claims are less than the funded amount. If claims go over the funded amount, reinsurance covers the exposure through stop-loss coverage.
For employers with 50 or more employees there are also excellent self-insured options available as more insurance companies are now providing reinsurance to these smaller groups.With the new options available in the marketplace, employers of all sizes can now take control of their health care plans by making the switch to self-funding.
The Upside of Self-Funding
Most SMBs want to get off the rate increase merry go round they face every year, and self-funded plans let them do just that because the employer has greater control over the plan design and money allocated to pay claims. A good self-funded plan should levelize the employer’s medical benefits spend over a three to five year period.
There are three components to the cost of a self-funded plan. There are two areas of fixed costs, the administrative fee, which is a set amount per employee per month to manage the program and process claims, and reinsurance premiums. The third component is the employer’s aggregate or claims attachment factor, which is the employer’s liability for all covered persons on claims under the stop-loss amount. Instead of sending the insurance company a check for the full amount each month, the employer pays himself first, and then pays for only the admin expenses, reinsurance premiums, and actual claims processed that month. The employer retains the money not used for claims, and at the end of the year typically has a surplus left. For example, if an employer has a stop-loss of $50,000, and a claims liability limit of $600,000, reinsurance covers all claims over the $50,000 stop-loss amount and all claims which exceed the $600,000 claims liability. If the claims under the $50,000 stop loss total $400,000 the employer retains the $200,000 difference instead of paying it to an insurance company. With a fully insured plan, the insurance company would have kept the money and the employer wouldn’t see a dime, and would typically receive a rate increase at renewal.
In Texas, only a handful of carriers currently offer fully insured plans; however, employers can choose from 15-20 highly rated reinsurance companies if they are self-funded. With more competition plan costs are kept down, which can lead to immediate savings. Self-funded plans also offer greater flexibility in plan design and management. Since the employer essentially acts as the insurance company, they can make needed changes at any given time, such as making a mid-year plan change to correct over-use of benefits or help with cash flow.
In addition, self-funded plans provide more data than is available in a fully insured model, giving smaller employers greater insights into claims utilization than they have with fully-insured programs. By capturing employee data through HIPAA-compliant reports, SMBs can gain valuable insight about their group’s health status. This information can be used to inform the plan design, while predictive modeling tools can help project future healthcare costs, based on known illnesses and health risks.
Similarly, self-funded employers can analyze claims utilization data to see exactly where every dollar is going and identify certain risk areas to reduce expenditures. For example, if data shows that employees are visiting the emergency room after hours, rather than seeing their primary care physician during the work day, the employer can adjust the plan design to change this behavior. Having access to claims data and the ability to manage the plan design enables the employer to save thousands on claims costs without compromising the level of care to employees.
The Importance of Discipline
Despite their many advantages, self-funded healthcare plans are not for everyone. A business that is suffering cash flow problems or is not financially disciplined is not a good candidate. To realize the full benefits of self-funding, the employer needs to set aside money for plan expenses each month and keep it protected, regardless of what other expenditures (or temptations) may arise.
Our team at MMA-Southwest knows and understands the self-funded market, with unique experience and insights few others offer. We can put together data on plan options and address the pros and cons of self-funding for businesses large and small. If you are looking for better plan design, greater plan flexibility, and improved cash flow control, we invite you to contact us and explore whether self-funding is right for your business.