Self-funding: 4 misconceptions & 4 questions

In recent years, many employers with fully-insured plans have experienced sticker shock as they watched their premiums rise. Health care costs, in general, are trending upward, reflecting not only inflation but changes in federal policies and health care utilization. The pandemic has altered the way that employees approach their benefits election process and put greater stress on the importance of compelling benefits packages in attracting and retaining talent.

One way for employers to take control of their health care spending and better tailor benefits to employees is to consider the move to self-funding.

Is your client a good candidate for self-funding?

Don’t wait for your clients to come to you with questions about self-funding. As a trusted advisor, your role is to keep clients informed about trends and options that may not currently be on their radar. Here are four questions to get the conversation started with your clients:

Are you feeling priced out of fully-insured coverage, but still interested in offering benefits?

If your client has historically relied on fully-insured coverage but suffered significant premium increases, they may be reconsidering their ability to provide sponsored coverage. These employers are looking to their broker partners for guidance on other options that can be tailored to their needs and budget.

Are you looking for more control over health care costs?

Even if a client is largely satisfied with their current coverage and costs, ongoing impacts from the pandemic and a general inflationary environment must be considered. Understanding the potential advantages of self-funded coverage can help clients make better-informed decisions about their overall financial plans.

Are you overpaying for your coverage?

Given that many carriers increased their premiums in recent years, employers may accept relatively small annual increases without question. But clients are looking to their broker partners to help them understand whether or not they are getting a good value for their money.

Are you open to trying something new?

Every client has a different appetite for risk and varying expectations for a return on their investment. In the first year of self-funding, costs can be unpredictable. Plus, in many cases, it can take three to five years to fully realize the benefits of self-funding. Clients with a low tolerance for risk or who are accustomed to seeing rapid results may find the adjustment period frustrating.

Even if your client or prospect answers “yes” to all four questions above, some employers will still be more comfortable sticking with the familiar. If you’re confident that the client would benefit from self-funding, continue to share information and revisit the conversation periodically. It may just take time for them to become more comfortable with the idea of change.

Common concerns and misconceptions about self-funding

For companies that have never considered self-funding, the term itself can be daunting. Clients may associate self-funding with mega-corporations or assume that the shift would increase administrative burdens for their employees. Here are four of the most common misconceptions about self-funding and how to address them with clients.

Our company is too small to self-fund: According to the Kaiser Family Foundation (KFF) 2022 Employer Health Benefits Survey, at employers with 200 or more employees, 82% of covered workers have self-funded health plans. Rather than choosing from one-size-fits-all fully insured plans, self-funding allows smaller businesses to tailor their coverage to their workforce, leading to more meaningful benefits options for employees.

Self-funded plans are labor intensive: Moving to a self-funded plan doesn’t necessarily mean you need to increase headcount or hire your own in-house plan administrator. A quality TPA will handle all aspects of administration, from enrollment and claims processing to serving as the point of contact for employee questions. Making the move to self-funding does not necessarily require hiring more employees.

Employees will be confused or not understand their responsibilities: Many employees enrolled in self-funded plans are not even aware of how their insurance plans are funded. From the covered worker’s perspective, reference materials, ID cards, and communications often still bear the logos of well-known insurance carriers. They select and visit providers and make copays just as they would under a fully-insured plan. The move from fully insured to self-funded can be an easy, even invisible, transition for employees.

Self-funded plans require large amounts of cash on hand: As with fully-insured plans, self-funding plan sponsors pay a set amount each month, based on projected medical costs. This allows sponsors to build up a fund from which they pay claims as they arise throughout the year. But unlike fully-insured plans, if actual claims for the year are less than the premium payments, self-funded plans retain the unused funds.

Test the waters with level-funding

Level funding can also be a good transitional step for companies looking to move from fully-insured health plans to self-funding. Level funding provides the consistent, predictable monthly expenditures of a fully-insured plan, but with the flexibility and lower regulatory obligations of self-funding.

Level-funded plans are a type of self-funded plan where employer contributions are made on a monthly basis. The employer pays a carrier a set amount each month, which helps with budgeting and financial planning. The monthly fee covers estimated costs for expected claims, administrative costs, and stop-loss insurance, which caps the total annual losses for self-funded plans.

Unlike self-funded plans, the cost of a level-funded plan is consistent from month to month, creating more stability in financial planning for the year. At the end of the plan year, carriers make adjustments based on whether the total claims costs are higher or lower than what was projected for the year. For lower costs, the adjustment may come in the form of a refund. (If actual claims are higher than expected, there may be a premium increase on the stop-loss insurance renewal.)

Level-funding can be a great way for employers to test the waters of self-funding, but with lower risk and no long-term obligations. After a few years and with a better understanding of the health of their employee base, some employers may want to move to a true self-funded model. Others may find that, for one reason or another, they are more comfortable offering fully-insured health plans, despite the higher costs and more stringent regulatory requirements. Still others may find level-funding to be the “just right” balance that’s right for their business and employees. The only way to find out is to start the conversation.

Bob Love joined BenefitMall in 2018 as the President,  bringing with him more than 30 years of experience leading sales and operations teams in all size market segments at the national level.