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April 13, 2023
As health care costs continue to rise, employers need ways to control costs. At the same time, benefits must be affordable and attractive to employees. One popular solution is moving to a self-funded health plan. Here is what you need to know when considering self-funding.
Self-funded plans are a popular benefit plan solution. A 2020 Kaiser Survey found that 67% of employees get health coverage from self-funded plans. This is a 23% increase since 1999.
Changing health plans is a major decision for any organization. Transitioning to a self-funded health plan can present opportunities and challenges. It is vital that employers understand what to expect when implementing this type of plan.
What Is a Self-funded Health Plan?
With a self-funded health plan, an employer assumes the financial risks of providing benefits. They no longer pay a fixed premium to an insurer. Instead, the employer collects premiums from enrollees. They pay employees and their dependents’ medical claims out of pocket as they are incurred. Employers can administer their health plans themselves or contract with third-party administrators (TPAs).
Benefits of Self-funded Health Plans
There are several reasons an employer may choose to consider self-funding.
Reduced costs—These plans often cut unnecessary expenses, including state-levied premium taxes. At the end of the plan year, employers can keep the surplus contributions. This surplus can reduce future contribution rates or increase benefits coverage for employees.
Increased flexibility—Self-funding offers more flexibility than fully insured health plans. They are exempt from many state health insurance regulations and benefits mandates. These plans also allow for customization to meet employees’ needs. They better manage health care costs while benefiting from a large provider network. Since employers with these plans pay claims as they occur, they may have increased cash flow.
Enhanced claims management—Self-funded health plans permit increased transparency. Employers can access and review data. Armed with this data, they can manage their employees’ health claims instead of relying on others. This reduces administrative costs. This insight also allows organizations to adjust their coverage and programming each year. As a result, they can better meet their employees’ needs.
Considerations Before Moving to a Self-funded Health Plan
Despite the potential benefits, self-funded health plans can present significant financial risks. The primary issue is when claims exceed employers’ cash reserves. Organizations mitigate this risk by purchasing stop-loss insurance. This limits the claims amount employers pay each year.
There are challenges to consider before transitioning to a self-funded health plan:
Employers often experience cash flow management challenges when moving to a self-funded health plan. Employers must create a budget to manage costs and pay medical claims on time.
Self-funded health plans work well for organizations with strong cash flow or reserves.
Cost and Risk Management
Self-funded organizations are responsible for paying health claims as they are incurred. As a result, they need effective strategies to contain costs and mitigate risks.
Reviewing financial and claims data can provide employers with important insights. They can see even better cost management results when a clinical team review their data.
Workforce Size and Demographics
Catastrophic claims can drain an employer’s cash reserves. This jeopardizes the plan’s long-term viability. So, evaluating workforce size and demographic data is critical. Older employees usually have more health needs, resulting in more claims.
Employees with chronic illnesses tend to have greater claim frequency. This increases the employers’ risk of high losses. Population data is vital to help understand an employer’s risks of moving to a self-funded plan.
Determining Employee Contributions
Self-funded employers decide how much employees must pay in premiums. If employers their intake is too low, they may not be able to cover claims.
Employers with self-funded health plans often use premium equivalents to develop their budgets. A health plan budget allows employers to calculate the necessary premiums to cover anticipated claims.
Utilizing Health Care Claims Data
Gaining access to employee health claims data is a powerful tool. Financial and clinical data can provide insight. Armed with information about diagnoses and claims, companies can better understand their costs. This data enables employers to better control their health care costs.
Preparing to Switch to a Self-funded Health Plan
Transitioning to a self-funded health plan can be a lengthy process. Employers should consider these strategies when preparing to make the change.
- Consider collaborating with a broker with self-funding experience.
- Create a transition plan and establish a timeline.
- Consider partnering with a TPA for health plan design and provider network choice.
- Evaluate stop-loss insurance to help mitigate risks.
- Decide on the plan’s policies and coverage.
- Ensure the plan complies with applicable legal requirements.
- Train benefits managers and other personnel on the new plan.
- Educate employees on the plan’s benefits.
These steps may seem overwhelming. A best-in-class broker could be helpful as you navigate this transition. An effective strategy can help avoid unnecessary challenges and delays. As benefits costs around the industry continue to soar, a self-funded health plan could help stabilize costs and build a benefits package that attracts and retains top talent.