How Self-funding Improves Profits
With health care costs continuing to rise as we start off 2022, many employers have turned to self-funding as a solution to control their spend. According to the Employee Benefit Research Institute, “the percentage of workers in self-insured plans has been bouncing around between 58 percent and 60 percent since 2013.” Though self-funding is not the perfect solution for every employer, it has many advantages that can ultimately help decrease costs and improve profits.
Ownership of Risk
Self-funding places the responsibility on the employers to pay for employees’ health claims themselves as opposed to being fully insured, where employers pay monthly premiums and fees to an insurance company to take on the claims payments. The biggest concern of self-funding is the volatility of taking on those claims payments. However, when you look at the risk over time, self-funding can be a more cost-friendly option.
Most insurance brokers and consultants who evaluate self-funding with their clients take the approach of looking at claims projection over five years. When budgeted correctly, three of those five years should leave you with an excess reserve that goes straight back to your pocket and not to an insurance carrier. For the other two years that might be more costly, stop-loss insurance is in place to protect against catastrophic claims above a predetermined level. By pocketing the surplus savings and fees that would have gone to an insurance carrier, employers can improve profits by taking on the risk internally.
There are potential tax savings that come with a self-funded plan. While fully insured plans are subject to a state premium tax, self-funded plans are regulated under ERISA and not taxed on premium by the state. Though self-funded groups still pay tax on the stop-loss premium itself, it is a much lower amount than the total fully insured premium paid to an insurance company. This provides an average savings of about 2-3 percent of the total premiums for an employer and is significant to the bottom line of spend.
Network and Program Control
Once self-funded, there are plenty of other ways outside of fees and taxes that help employers improve profits. Self-insured plans can come bundled where the administration, stop-loss, network, and pharmacy management programs come together as an off-the-shelf version. Though this is often a more straightforward approach, there can be a lot of savings when unbundling these services. Employers have more control over the spend by shopping the market for the lowest cost solutions for a self-insured plan. This also provides the opportunity to be more involved in the design and program offerings.
Though the health of the employee population should always be a priority, the decisions employees make around their health do not directly impact employers on a fully insured plan as it does when self-funded. Wellness programs, benefit education tools, and condition management programs work to help employees be better consumers of their healthcare and take control of their health. When an employer is self-funded and assuming the risk of claims, these employee-focused programs can help improve the group’s overall health and control claim costs, improving the employers’ healthcare spending over time.
Moving to Self-Funding Insurance
Underwriting and claims projection play a significant role in the conversation around whether a group should self-fund. Factors such as group size, employee age and gender, and past claims data project risk over time and compare expected claims cost to a fully insured renewal to determine if self-funding is a fit.
At Verikai, we provide risk reports on the group and individual level to help consultants determine if a group is a good fit for self-funding – all within a matter of seconds with just a census file alone. Our database contains clinical information, first-dollar claims, and behavioral data on most of the United States population. This information gives us a better understanding of how the individuals in the population behave and ultimately what their clinical outlook is.
With self-funded health plans becoming a popular solution for employers looking to improve profits and control the increasing costs in the healthcare space, technology plays a key role in making this solution work. As advancements continue to bring more tools to the market to help employers make educated decisions on their offerings, it will be exciting to see more employers taking more control of their overall benefits spend and profitability.
Fronstin, Paul. “Trends in Self-Insured Health Plans since the ACA.” EBRI, https://www.ebri.org/content/trends-in-self-insured-health-plans-since-the-aca.