How to Get the Benefits of Self-Funding without the Risks
There are typically two approaches to securing health coverage for your staff – group health insurance or self-funding.
Self-funding, however, can be costly and risky and is usually only done by larger organizations with thousands of employees. But there is a hybrid model that can help small and mid-sized employers provide their staff with affordable health coverage: partial self-insuring.
To understand how partial self-insuring works, we should start with the basics of what a self-insured plan is. In a fully self-insured plan, the employer bears the risk of all costs incurred under the plan for claims and administration.
In essence, the employer acts as the insurer and pays claims from a fund that it pays into along with employees, who pay their share of premiums into the fund.
Also, the employer will usually contract with a third-party administrator or an insurance company to process claims and provide access to a network of physicians and other health care providers.
How partial self-insuring works
Partially self-insured arrangements provide some of the benefits of being self-funded but without all the risks, while plans will have the same benefits as insured plans have. Here’s how they work:
- Employers and their employees still pay premiums, a portion of which goes into an account that will be tapped to pay the first portion of claims that are filed. That means that the employer is acting as the insurer for those claims.
- The other portion of the premium is paid to an insurance company. This is sometimes known as a stop-loss policy.
- Plans have an aggregate deductible for all claims filed by employees, meaning that once that deductible is reached an insurer starts paying the claims instead.
- Premiums are calculated to fund the claims to the aggregate deductible amount. In other words, the employer and employees are paying for the worst-case scenario in each policy year.
- It is possible for the employer to get a refund at the end of the policy year if the total claims come in at a level that is less than expected. The employer can either be reimbursed for this amount or use those funds for the next policy year.
Lower risk than fully self-insured plan
Typically, an employer should have at least 25 workers if it is considering a partial self-funded arrangement, but we’ve seen plans with fewer enrollees.
Many employers will opt for a partially self-insured plan to save money, but these types of plans also allow an employer to design a more useful and valuable plan for its workers.
The key to making this work is cost control, without which claims can spiral and drive up premiums at renewal.
Knowing exactly how much to set aside for reserves and how much you should set your employees’ premiums, deductibles and other cost-sharing can be complicated.
But with the right mixture of benefits, plan design and education, you can control behavior, which drives claims, in order to keep renewal rates from increasing too much each year.
The fine print
That said, there are some reasons partial self-insuring isn’t for all employers:
- There is additional responsibility, as the employer basically becomes an insurer or sorts.
- There is additional paperwork for these plans since the employer also becomes a payer.
- There are compliance issues that the employer needs to consider (ERISA and the Affordable Care Act, for example).
- There is some additional risk to the employer, as it is paying claims.
- If you have too many claims, you could face a non-renewal by your stop-loss insurer. If you are cancelled, it may be difficult to seamlessly enter the insured market.