Not so risky business: Consider self-funding health plans

If you’re an employer offering a fully insured health plan, you might feel like controlling health care costs is out of your hands. Your rates continue to rise, with little to no claims data to justify the increases. The current industry players offer few alternatives to lower the cost. And there’s no reward for you or your employees if your company has a low-claims year. So when it comes to rate hikes, you can either find more budget or raise deductibles and copays to shift costs onto your employees.

So why are so many employers simply accepting the status quo? Is it fear of the unknown? Risk aversion? Or plain old inertia? Perhaps it’s more a misunderstanding of when a different option – like self-funding – makes sense, or how to even get started. We’re here to break it down.

Hang on – self-funding sounds risky

Health care benefits are all about risk financing – and one option isn’t necessarily riskier than the other. To put it simply, the key difference between a fully insured and self-funded health plan is who assumes the risk for paying claims. In a fully insured plan, all premiums remain with the insurance carrier at the end of the plan year, whether they were paid out as claims or not. A self-funded plan, on the other hand, is not a use-it-or-lose-it situation. The company pays only for actual claims, with protection for large claims or realized savings when claims are lower.

Yes, the funding option your company selects does affect the risk exposure. But it also shapes your ability to control and customize your plan. In fact, with self-funded plans, tools like stop-loss insurance to blunt or offset most of the risk allow you to limit the exact amount of risk you feel comfortable assuming, rather than having it dictated by a health insurance carrier.

Does the funding fit?

Traditionally, self-funding has been the preferred financing structure of 1,000 employee-plus employers, largely because they’re more likely to have cash flow and reserves to absorb a bad claim year. But today, with health benefit costs continuing to rise about 5% each year and many employers leaning away from cost-shifting strategies, employers with less than 1,000 employees are checking out self-funding options as well.

Related: Self-funded plans: Examining the pros, cons, and misconceptions 

It turns out, the flexibility, control and transparency of self-funding can make it an ideal fit for small (51-plus employees) and mid-size businesses. And while it’s not the right choice for every business, for many, the ability to better manage and customize their plan is worth exploring.

Turning data into dollars

This increased level of transparency and control has made the move to self-funding a growing trend for small and midsize employers. In one recent survey, 93% of benefits advisors and consultants surveyed said self-funding was in the best interest of their customer’s long-term strategy.

Because the self-funding company is paying the claims, they can dig deeper into what’s driving expenses to account for every dollar and allow for better plan and financial decisions.

Instead of feeding cash into ever-inflating fully insured premiums, a self-funded plan gives employers control to offer a plan that’s best for their needs and more affordable for their employees. They can build their own network with high-value providers and incentivize the right level of care at the appropriate time. They can design a plan to reduce costs for the company and their covered employees while avoiding state mandates and premium taxes.

Take it down a level

If self-funding sounds like too big of a leap from fully insured, there is another option to consider. Level funding is a midway approach for employers ready to move away from a fully insured plan while keeping the consistency and predictability that came with it.

With a level-funded plan, an employer pays a set monthly amount to cover the estimated cost for expected claims, the premium for stop-loss insurance and plan administration costs. If total claims costs are higher or lower than expected, the plan carrier makes adjustments at the end of the plan year, often in the form of a refund – something you would never see in a fully-insured arrangement.

Facing the facts

Change can be scary, but you know what’s even scarier? Getting a fully insured rate hike with no data to back up why it’s gone up or where/when it might stop. There’s nothing comforting about navigating health care costs in a fully insured fog. A self-insured (or level-funded) plan, however, offers a view into cost drivers and price points that can actually help employers gain control of health benefits expenses for themselves and their employees.

Health care is likely one of the highest line-item costs in a company’s budget and has a considerable impact on the health and financial wellness of their employees. If annual rate hikes mean rising deductibles and copays for workers and less cash for salaries, benefits and other business investments, it’s time to break the cycle and talk about self-funding.

Drew Burns is Mid-Market Sales Lead for Centivo.