As costs for healthcare continue to climb, so do health insurance premiums. It’s estimated that large employers will see a 4.3% increase in health benefit costs in 2018. Small employers and their workforce are feeling the pinch even more. Workers of small firms typically contribute over $1,500 more annually for family health coverage than those at large firms, and pay nearly twice as much in deductibles.
Escalating costs are leading both large and small employers to consider self-funding their health insurance, as evidenced by the growing number of self-insured group health plans sponsored by employers.
In the past — because there’s a greater population to spread the risk over — larger employers have been more likely to adopt the self-funded model. But as costs climb and changes to the Affordable Care Act (ACA) are expected, smaller and mid-size businesses are taking a serious look at the option. If your company is considering self-funding, here’s what you’ll want to keep in mind.
With a self-funded health insurance plan, the company assumes the financial risk for its employees’ healthcare premiums, which sounds unappealing at first. But it doesn’t mean the company takes on all the exposure, and the benefits can often outweigh the risks.
A self-insured employer and its employees put money that would normally be paid out to an insurance carrier into a special fund that is earmarked for paying out claims. The amount available to each individual for claims may be as low as $25,000 or as high as $300,000 depending on the amount of risk the employer wishes to take on.
What happens if there are multiple catastrophic health events and the total amount of the fund is depleted? That’s where the importance of aggregate stop-loss insurance comes into play. It’s a type of reinsurance that an employer purchases to help mitigate the risks of annual claims that might exceed the amount taken into the fund. Aggregate stop-loss insurance is unique to self-insurers, and the more risk an employer is willing to take on, the less expensive the aggregate stop-loss insurance premium will be. With such a backup plan, a company wouldn’t pay out more than the total fund for all employees.
Every organization is different, and self-funding isn’t for everyone. A company needs to take into account the overall health of its group: Are there a number of chronic illnesses, diabetes, cancer, a history of major surgeries and procedures, etc.? These types of conditions notoriously result in major claims that could quickly deplete funds.
If your employees are generally in good health, however, self-insurance is worth considering. Here are additional reasons it may make sense:
With traditional insurance, there’s typically a single network of doctors and employees may not be able to see the healthcare providers they prefer. With self-funding, employers are able to independently contract with healthcare providers.
Unlike traditional insurance plans, employers can more readily adapt as needs change and not have to wait for existing contracts to come due. Employers can also custom design a benefit package rather than using a traditional “one-size-fits-all” approach.
Instead of an insurance carrier holding onto premium funds, an employer maintains control over health plan reserves and can receive the investment and interest income, and health care coverage is paid only when claims are made.
In the long run, most self-insured employers with a generally healthy workforce save money because they can customize benefit packages and adjust as time goes on. Consider the following scenario:
An employer spends $2 million in a given year on traditional group coverage, but only has $1.2 million paid in claims. The result is an $800,000 profit for the insurance company. If a self-funded business set aside that same $2 million for its healthcare, the unused funds would remain with the employer and allow them to minimize future risk and lower direct costs.
When a company works with a broker to determine its healthcare needs, a funding analysis report can be generated to provide a snapshot of how well or poorly a group is doing. It offers full transparency of how much in premiums came in and how much was paid out in claims, stop-loss premium and administration for each covered individual. These types of insights allow employers to identify areas of improvement and plan better in coming years. The broker will also help identify reputable third-party administrators (TPA) to help manage its health insurance needs.
There is always the potential that an employer may have to pay out the majority or all of its reserved funds if there are a lot of high-cost claims. This emphasizes the importance of understanding the overall health of an organization and working with a broker to make a proper assessment.
It’s best for an employer to plan for the worst-case scenario and have stop-loss insurance in place as a protection mechanism. A reputable TPA will also take on the fiduciary responsibility to further protect an employer.
It’s best to work with professionals who understand the benefits and risks of both traditional fully insured and self-insured platforms, and who can help ensure that your company remains in compliance with state and federal regulations including ACA, HIPAA, ERISA and others.
A broker, such as McClone, will advocate on your behalf, answer questions and explore multiple options with reputable carriers to help you determine the best fit for you and your employees. Their team of professionals will also help you determine your risk tolerance and projected annual expenses based on the health of your organization. Reach out to McClone today to learn more about self-funding and other health insurance options.