SELF-FUNDED HEALTH PLANS

Fully-Insured (Traditional Plans) vs. Self-Funded Plans

A fully-insured or traditional product is a fixed cost and no matter how many claims an organization does or doesn't incur, the same monthly cost will apply. These plans include traditional plans through Premera, Regence, Aetna, etc., and are available to organizations with two or more qualifying employees. On the other hand, with a self-funded product, the organization pays the claims as they are incurred. In the years with "average" to "below average" claims, the organization reaps the savings. However, in the "bad" years the organizations are protected with stop loss and pay a comparable "fully insured" amount. Self-funded plans are available to organizations with 100 or more employees, and are available on a limited basis to organizations with 20-100 employees.

With Fully Insured Plans, the premium dollar consists of the above fixed cost factors.

With Self Funded Plans, a larger percentage of the employer's dollar can be expended towards the cost of claims or the variable cost.

Advantages of Self Funding

Self-funded plans hold tremendous benefits for certain organizations. These benefits include reduced costs, control over their cash flow, and increased service. For the plan to operate most effectively, and for it to generate the most value to the organization, care must be taken to set the program up properly. When constructed and managed correctly, a self-funded plan is a great way for an organization to more effectively control its healthcare costs.

Self-funded plans work especially well for organizations with good claim experience and/or a relatively young workforce. Many times, the total maximum cost (including maximum claims run out along with fixed expenses) will fair better than if a total premium was paid to an insurer. For example, if the claims run at or near the expected rate, the organization's overall costs will be less than those on a fully-insured plan. However, the employer will need to obtain Specific and Aggregate Stop Loss to have protection limits on maximum employer liability. When weighing the benefits of such a plan, it is crucial that all costs are considered and illustrated on a basis that reflects the total claim liability under the plan.

Reduced Fixed Costs

Self-funded health insurance plans typically save 30% on administrative costs associated with payment of claims over traditional health insurance plans.

Cash Flow

Unlike traditional plans, if and when claims occur under a self-funded plan, they are paid only when they occur, and are not paid by premiums. The money for the payment of claims is only required when the claims occur, which allows the organization to earn interest on the money, instead of insurance companies under the traditional plans.

Plan Flexibility

Self-funded plans offer organizations many possibilities for plan design. Coinsurance, deductibles, covered benefits, and excluded benefits can all be custom tailored to meet each organizations different need.

Claim Experience Reports

Claim Experience Reports are used for the organization to identify claim trends specific to the organization, and therefore the organization can better manage and control the costs of the benefit plan it uses.

Disadvantages of Self Funding

Self-Funding isn't appropriate for every employer. To be effective in attaining the advantages of self-funding, the employer must be willing to exercise discipline – over eligibility for benefits, over the actual payment of claims, and in the incurring of expenses. Even then, self-funding may not reduce costs every year – or at all. The employer must also be willing to deal with these potential disadvantages:

• Risk assumption. The employer assumes the risk between the normally anticipated claim level and the Stop Loss coverage level.
  
• Provision of services. The employer must provide the services the insurance carrier normally provides. This is generally accomplished by contracting with a TPA.
  
• Asset exposure. The employer's assets are exposed to any liability created by legal action against the self-funded plan.
  

While Specific and Aggregate Stop Loss protection limits maximum employer liability, there is some risk that is not transferred to the stop loss carrier. The employer must be willing to trade the complete security (and associated costs) of a fully insured plan for the possibility that actual cost will exceed what the fully insured plan would have cost.