When evaluating self-funded group insurance plans vs. traditional fully insured plans, there are two crucial factors to consider from an employer standpoint: cost and risk.
Working with one of the BUCA insurance providers might seem like the more convenient, more traditional path. However, it’s important for your clients to keep in mind that the goal of the insurance companies is to turn a profit. That’s it. As such, part of every premium is allocated to the payment of health claims, and part is allocated to profit for the insurance company. Profit generated by a traditional insurer comes directly from the policyholders.
In contrast, a self-funded health plan is funded by a trust of group policy holders, whose primary interest is in covering healthcare costs. The funds contributed to the self-funded insurance pool are used only for healthcare expenses. Any excess - including ‘insurance company profits’ - remains in the claims reserve for the benefit of the health plan’s future claims.
With self-funded health insurance plans, your clients eliminate the fully funded premiums paid to the insurer, reducing the average healthcare cost per employee as the employer keeps any excess funding reserves that are not paid out for medical claims, which often add up to 12% or more in annual savings. Additionally, self-funded plans are not subject to state health insurance premium taxes (usually 3% to 5% of the total premium not paid out for medical claims).
Essentially, employers offering traditional plans pay a set amount of money each year, whether or not their employees make claims large enough to match the amount of coverage they’ve chosen. With the self-insured model, employers are only paying for the claims that are made, and nothing more. Additionally, because self-insured plans are not beholden to many of the government regulations that insurance providers face, costs are lower and far easier for companies to manage.
In fact, the Self Insurance Education Foundation estimates that companies who adopt self-funded group health insurance plans save anywhere from 10% to 25% on their annual healthcare costs.
Cash Flow Control
A related ‘cost control’ benefit of a self-funded insurance plan is that the employer has improved cash-flow control. For small to midsize businesses, it’s especially important to control health insurance costs. If premiums unexpectedly increase from year to year with a traditional insurance provider, it can be difficult to plan how your cash will be allocated. With a self-funded insurance plan, you have greater transparency into where your funds are going, how they’re being used, and how much you will need for the future. Future costs are dictated by the self-funded plan’s experience, greatly reducing the unexpected annual rate increases driven by community-rated fully insured plans.
Risk Assessment and Mitigation
Traditional, fully-insured health insurance is often identified as an attractive option for small to middle market employers because of the perception that it helps mitigate and manage the risk of healthcare expenses. No employer wants to be caught out having to pay for catastrophic claims. So companies pay a set premium to an insurer, and in turn, the insurer agrees to pay the employee’s eligible healthcare claims. All risk transfers to the insurer – no matter how many - OR FEW - costs are incurred in eligible claims.
When it comes to self-funded health care, the employer does retain a portion of the risk of paying claims. However, the risk can be structured and managed in a way to cap the total costs of the plan so that they employer doesn’t exceed the amount they would have paid for a fully-insured plan - while keeping any non-incurred claims savings. This is in addition to the elimination of state-mandated taxes and the complexities of managing a health-plan across multiple jurisdictions. To minimize the claims risk, small and middle-market companies secure a medical stop-loss policy to cover excess claims so that the company can forecast and manage cash flow just as they would under a fully insured health plan. These medical stop-loss, or reinsurance, policies cover events such as catastrophic medical claims, or a high-frequency of total claims during the policy period, which exceed a predetermined amount or deductible. This reduces risk for the company and ensures there will always be enough resources to cover the cost of any claim.