Self Funded Insurance
The absolute first thing you have to understand is that self funded insurance isn’t self funded.
Is that statement oxymoronic? No, it’s a fact.
Self insured medical plans are really just partially self funded health plans. The difference is more than academic — it’s the difference between overpaying for health insurance and spending just about the right amount.
In partially self funded insurance, the employer actually shares the risk with an insurance carrier. The employer hires a third party administrator to pay actual claims and purchases insurance to protect against extreme risk.
The risks the employer faces are:
- The very large case, appropriately called “shock claims” in the trade and
- Over-utilization. (When employees submit lots of smaller claims; no one claim is a killer, but in the aggregate, they add up to a lot.)
The state-sponsored survey mentioned in the sidebar also showed that only 15% of companies with <50 employees had self funded health insurance. This compared with 17% for firms with 50-99 employees, 41% with 100-250 employees, and 45% of those with >250 employees.
Does it (self funded insurance) work for these employers?
Apparently so. Almost two-thirds, 62%, had self-funded for more than five years, 22% for between two and five years, and the balance for less than a year. Clearly, once they dip their toes in the water, employers tend to stick with self funded medical plans.
So it seems that the reason that companies with <100 employees don’t self-fund more frequently is… fear of the unknown — once they try it, even if small, they stick with it. So it must work for many.
There are two basic approaches to “self-funding.” The most traditional is the one in which you would choose to set up a formal self-funded plan.
When you do this you retain a third party administrator to pay claims, and you purchase “stop loss” insurance to protect you against either a few large claims or excessive use of the plan by a larger number of employees. Either can drive your costs higher than they would have been had you remained fully insured.
Where can I learn more?
We have prepared a White Paper Advisory on self-funding.
It gives an executive overview of the process and provides the questions you need to answer for yourself to determine if self-funding is the right thing for you and your company.
If you’d like to learn more about the details of self-funding, click here to learn how to get a copy.
Why Do Employers Self Fund?
The State of Massachusetts did a study in 2001 to answer that, and other, questions. What they found is interesting:
- 87% self fund to achieve health plan savings.
- 65% self fund so as to offer a richer benefit package
- 49% self fund so as to offer a consistent national health plan
- 20% self fund to avoid state mandates
This flies in the face of common wisdom, which states that virtually all self funding is done to avoid state mandates. It may be different in other states because Mass has reasonable state mandates compared to may states, but the large numbers of employers giving totally different reasons is suggestive.