A growing number of U.S. employers are making the switch to self-insuring as a way to reduce costs and improve service. Self-insuring or self-funding is not right for every organization. Employers considering a switch from fully funded to self-funded health plans should analyze the advantages and disadvantages before making the switch.
What is it? According to the Self-Insurance Institute of America, Inc., “a self-insured group health plan (or a self-funded plan as it is also called) is one in which the employer assumes the financial risk for providing health care benefits to its employees. In practical terms, self-insured employers pay for each out-of-pocket as they are incurred instead of paying a fixed premium to an insurance carrier, which is known as a fully insured plan. Typically, a self-insured employer will set up a special trust fund to earmark money (corporate and employee contributions) to pay incurred claims.” Employers can be partially or fully self-insured. Employers that choose to partially self-fund, may decide, for example, to continue third-party coverage of mental health or prescription benefits, but self-fund all other medical claims. Self-insured group health plans are governed by a variety of federal laws including, but not limited to: ERISA, HIPAA, COBRA, the U.S. tax code and federal anti-discrimination laws such as the ADA.
Self Insured Advantages
1. Reduced insurance overhead costs. Carriers assess a risk charge for insured policies (approximately 2% annually), but self-insurance removes this charge.
2. Reduced state premium taxes. Self-insured programs, unlike insured policies, are not subject to state premium taxes. The premium tax savings is about 2%-3% of the premium dollar value.
3. Avoidance of state-mandated benefits. Although both insured and self-insured plans are governed by federal law (predominantly ERISA), self-insured plans are exempt from state insurance laws. State benefit mandates can add to the cost of insured employer benefit programs. For multi-state employers, selffunding can help create national consistency by elimination of the need for state-by-state compliance.
4. Employer control. Employers who want to revise covered benefits and the levels of coverage are free from state regulations that mandate coverage and the carrier negotiation typically required with changes in insured coverage. By self-funding, employers are able to design their own customized health benefit packages.
5. Employers see improved cash flow since they do not have to pre-pay for coverage. Claims are paid as they become due. There is also a cash flow advantage in the year of adoption when “run-out” claims are being covered by the prior insurance policy. Employers pay for claims rather than premiums and earn interest income on any unclaimed reserves.
6. Choice of claim administrator. An insured policy can be administered only by the insurance carrier. A selfinsured plan can be administered by the company, an insurance company or independent third-party administrator (TPA), which gives the employer greater choice and flexibility. When selecting a TPA, employers should consider whether the TPA efficiently handles claims, has contacts with stoploss carriers, has a strong reputation, cost management skills and negotiating clout, has medical expertise on staff and provides excellent customer service and claims administration.
The primary disadvantage of self-insurance is the assumption of greater risk. A year that brings large unexpected medical claims requires that the company has the financial resources to meet its obligations. This unpredictability puts greater demands on budgeting and cash flow. Budgeting is more difficult because health care expenses will vary from year to year, whereas with a fully insured plan, employers know how much they will pay in premiums in a given year. Self-insured plans also require strong administrative skills.
Self-insured employers can either administer claims in-house or subcontract the administrative obligations to a TPA. TPAs can help employers set up their self-insured group health plans and coordinate stop-loss coverage, provider network contracts and utilization review services. Some of the additional administrative duties associated with self insurance may include monitoring the plan, determining premium rate equivalents for budgeting purposes, administering employee contributions, filing annual reports and day-to-day administration of the plan, establishing a trust to fund the group insurance plan and setting up cash reserves to offset claim run-out liability.
HR Elements welcomes the opportunity to help your organization examine its plan designs and make recommendations for improvement. We have strategic partners that can help you build the best benefit package for your organization.
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