Is Self-Funding Right For Your Group?

Posted on March 4, 2020 by admin
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According to The Namely Blog employers spend an average of 31% of their employee compensation budget on group health insurance benefits. It may be time for you to consider new funding strategies for your benefit plan, but how do you know what’s best for your organization? A good place to start is to understand the different types of funding options available.

Types of Funding

Fully-Funded

In a fully-funded group health insurance plan, the employer pays monthly premiums to the insurance carrier so that all administrative responsibilities, claims handling, and risk associated with your company’s employees are handled by the carrier. A large portion of the cost goes towards paying claims, while the rest is for the administrative costs, reserves, and taxes. In this model, while the risk to the employer is lower, the costs can be significantly higher. Employers of any size can be fully-funded, but it is a especially a great fit for small employers who may not have the resources to fund their own plan.

Level Funded

A level funded group health insurance plan has fixed monthly costs, but breaks down the premium into funding claims and paying administrative fees to a Third Party Administrator. According to benefitspro.com, level-funded plans are essentially pre-packaged self-insured health plans, with low attachment stop-loss coverage, that are now being marketed in most states to groups as small as 10 employees. The two biggest upsides to a level-funded plan for the right group are the potential cost savings and the decrease in risk, as the employer never has to pay more than the level amount.

Self-Funded

With self-funded insurance, an employer pays a small fee to an insurance company to “lease” their network of care providers. Employers are then responsible for paying monthly claims out of pocket as they actually occur, rather than paying a pre-determined rate to an insurer like in a fully-funded plan. With a self-funded plan, like with level-funding, the employer typically hires a Third Party Administrator to administer claims, though they can also handle these in-house. Employers collaborate with agents to determine their own premium rate that is sufficient to cover the network fee and the claims/reserves bank account and bills. Payments made by employees for their coverage are still processed through payroll, but rather than being sent to an insurer, the employer holds contributions until claims are due and payable; or, if being used as reserves, put in a tax-free trust held by the employer. Because the plan is funded by the employer, the risk is shifted from an insurance carrier to the employer as well. To offset this risk, stop-loss insurance is purchased to provide protection against catastrophic or unpredictable losses.

Why Employers Self Fund

According to hcaa.org, some of the most common reasons employers choose to self-fund are:

  • Plan customization to meet specific health care needs of their workforce.
  • Maintaining control over the health plan reserves, enabling maximization of interest income – income that would be otherwise generated by an insurance carrier through the investment of premium dollars.
  • No pre-paying for coverage, allowing for improved cash flow.
  • Not subject to conflicting state health insurance regulations/benefit mandates, as self-insured health plans are regulated under federal law (ERISA).
  • Not subject to state health insurance premium taxes, which are generally 2-3 percent of the premium’s dollar value.
  • Free to contract with the providers or provider network best suited to meet the health care needs of its employees.

Who’s a Good Fit

Because self-insured employers assume the risk for paying the health care claim costs for employees, it must have adequate financial resources to meet this obligation, which is not normally a guarantee; so self-insurance may not be the best route for small employers or those with poor cash flow. Although, there are businesses with as little as 25 employees maintaining self-insured plans, historically it has been a better fit for companies with at least 100 or more employees. A good benefits broker or consultant can help you analyze your organization to determine if you’re a good fit for self-funding.

About Rooney Insurance Agency

Rooney Insurance Agency, established in Tulsa, Oklahoma in 1960, has provided customized business and personal insurance and employee benefits solutions to individuals and businesses in the state of Oklahoma and throughout the United States. We work to ensure that each client’s insurance coverage fits their specific needs, addresses their key risks, and protects their valuable assets. For more information on how we can help you today, contact us at (918) 582-0565.