A self-funded plan is a type of health insurance arrangement where the employer takes on the financial responsibility of providing health care benefits to its employees. Unlike a fully insured plan, where the employer pays a fixed premium to an insurance carrier who then pays the claims, a self-funded plan allows the employer to pay the claims directly as they occur.
This means that the employer has more control and flexibility over how to design and manage the health plan, as well as how to invest and use the health plan reserves. A self-funded plan can also offer significant cost savings and tax benefits for the employer, as well as better access to data and care navigation for the employees.
How Does a Self-Funded Plan Work?
Typically, a self-funded employer will set up a special trust fund to earmark money (corporate and employee contributions) to pay for the health claims of its employees. The employer will also purchase stop loss insurance, which is a type of insurance that reimburses the employer for claims that exceed a certain threshold, either for an individual employee or for the entire group. This way, the employer can limit its exposure to catastrophic or unexpected claims.
The employer will also contract with a third-party administrator (TPA) or an administrative service only (ASO) provider, who will handle the claims processing, billing, enrollment, and other administrative tasks. The employer may also contract with a preferred provider organization (PPO) or a health maintenance organization (HMO) to access their network of providers and negotiate discounts.
What are the Benefits of a Self-Funded Plan?
There are many benefits of choosing a self-funded plan over a fully insured plan, both for the employer and the employees. Some of the most common benefits are:
- Plan Design Customization: The employer can tailor the plan to meet the specific healthcare needs and preferences of its workforce, instead of buying a generic insurance policy that may not suit everyone. For example, the employer can decide what benefits to include or exclude, what deductibles and copays to charge, what wellness programs to offer, etc.
- Cost Savings: The employer can save money by eliminating or reducing the insurance carrier’s profit margin, premium taxes, state mandates, and other fees that are typically charged in a fully insured plan. The employer can also benefit from improved cash flow, as it does not have to pre-pay for coverage, but only pays for claims as they occur. Additionally, the employer can earn interest income from investing the health plan reserves, which would otherwise go to the insurance carrier.
- Regulatory Compliance: The employer can avoid conflicting or burdensome state health insurance regulations and benefit mandates, as self-funded plans are regulated under federal law (ERISA). This can simplify the administration and reporting requirements for the employer, as well as reduce compliance costs.
- Data Insights: The employer can access detailed and timely data on claims utilization, costs, trends, quality, and outcomes, which can help the employer make informed decisions about how to manage and improve the health plan. The data can also help the employer identify high-risk or high-cost employees and provide them with targeted interventions or support.
- Care Navigation: The employer can offer better care navigation and coordination for its employees, by integrating point solutions (such as family forming or mental health benefits) with the health plan, or by contracting with providers or networks that offer high-quality and low-cost care. The employer can also steer employees to the appropriate care modality (such as telehealth or urgent care) that matches their healthcare needs.
Is a Self-Funded Plan Right for You?
Self-funding is not a one-size-fits-all solution. It may not be suitable for every employer or every situation. Some factors that may influence your decision to self-fund include:
- Size of Your Workforce: While self-funding is not limited to large employers or corporations, it does require a certain level of scale and stability in your employee population. A small or volatile workforce may not generate enough claims data or spread enough risk to make self-funding feasible or cost-effective.
- Financial Risk Tolerance: While stop loss insurance can protect you from extreme claims scenarios, you still need to be comfortable with assuming some level of financial risk and variability in your health care spending. You also need to have sufficient cash flow and reserves to pay for claims as they arise.
- Administrative Capacity: While you can outsource most of the administrative tasks to a TPA or an ASO provider, you still need to have some internal capacity and expertise to oversee and manage the health plan. You also need to comply with federal laws and regulations that apply to self-funded plans (such as ERISA, HIPAA, COBRA, etc.).
- Strategic Vision: You need to have a clear vision and goal for what you want to achieve with your health plan, such as improving employee health and satisfaction, reducing healthcare costs, enhancing your competitive advantage, etc. You also need to have a long-term perspective and commitment to self-funding, as it may take some time to see the results and benefits of your strategy.
If you are interested in learning more about self-funding and whether it is right for you, you can contact us for a free consultation. We can help you evaluate your options, design your plan, and implement your strategy.