Self-funding strategies vs. ICHRA as alternatives to traditional health insurance

The trend is clear: In recent years, self-funding has been steadily gaining popularity among companies of all sizes as an alternative to fully insured group health plans. As of 2023, 65% of employees were covered by a self-funded plan, compared to 44% in 1999. While self-funding was once embraced as a viable option only for larger corporations due to the substantial number of covered lives required for stability, rising costs and changes in regulations have made it more feasible than ever for smaller companies to go the self-funded route as well. 

For all its advantages, however, self-funding is not without its challenges – some of which may not become apparent in the first year of coverage. For one, stop-loss insurance is essential for protecting self-funded companies against large claims that could otherwise be financially devastating, but the rates for this necessary protection are skyrocketing. In 2022, companies saw an average increase of nearly 10% for stop-loss coverage premiums. This is on top of traditional health insurance premium increases for of 20% for family coverage over the past five years and 43% over the past 10 years. Stop-loss contracts also have varying costs depending on what type of contract you select and whether various components, such as lasering (a common practice that involves carving out higher deductibles for certain people) are included.

In addition to rising premium costs, administrative service only (ASO) fees and stop-loss premiums also have a maturity factor to consider. Carrier and third-party administrator (TPA) costs are based on the current demographics of the group. So for the first year, it’s an immature fee with the possibility of being guaranteed for a limited period, but afterward, there is usually a cost-of-living adjustment to the fees. These costs are sometimes difficult for companies to accommodate in their budget if they are unforeseen. 

Due to rising costs, some companies are choosing to unbundle their medical, pharmacy, dental, and other health care services. While this decision allows for a more flexible and tailored approach, it also creates additional administrative challenges. Managing multiple vendors, policies and systems requires significant effort and resources, making it a daunting task for many organizations and their often-overworked human resources teams.

Further complications can arise with self-funding when employers tailor their plans and look to the ASO guidelines that allow them to deviate from state-mandated benefits. This can cause employee confusion and complication if the employer also makes claim exceptions (i.e., allowing an individual access to a specific benefit not available to all employees). Furthermore, many carriers/TPAs will adjust their fees if the minimum auto-adjudication rates change because of the above actions.  

The bottom line is that regardless of whether a company is self-funded or fully insured, the claim exposure, volatility and administrative needs associated with managing multiple moving parts can be unanticipated and unbudgeted. This realization often leads companies to explore other options that provide more advantages and relieve the burden of claims monitoring, reporting and banking administration. 

One promising alternative is the individual coverage health reimbursement arrangement (ICHRA), a potential game-changer in the health care landscape. ICHRAs allow employers to contribute a fixed amount of money toward employees’ individual health insurance premiums and qualified medical expenses. ICHRAs are generating considerable interest as a viable alternative to self-funding for a few key reasons.

1. No claims risk and simplified administration

Unlike self-funding, where companies bear the financial risk of large claims, ICHRAs shift this responsibility back to the carriers’ state risk pools. By providing a defined contribution rather than specific health insurance coverage, employers can budget more effectively and potentially lower their health care and administrative costs.

2. Freedom from being in the insurance business

Traditional self-funding requires regular diligence to evaluate claims experience and adjust funding accordingly. With ICHRAs, this burden is lifted, as employees’ health expenses are separate from the company’s finances. This affords companies greater financial stability and predictability.

3. No renegotiating

With an ICHRA, there’s no concern about a costly, unpredictable and time-consuming renewal process, as the company is establishing its own contribution amounts and can expect small increases in the individual ACA-complaint carrier plans every year.

As self-funding gains traction, brokers and advisors must also stay informed about other evolving strategies and trends in the industry. While self-funding can offer considerable benefits for the right companies, it also presents challenges, such as rising stop-loss rates and complex administrative tasks. To address these concerns as the health care landscape continues to evolve, exploring innovative options like ICHRAs will be essential for ensuring successful health care benefit offerings in the years to come.

Tom Mafale is the Chief Revenue Officer at SureCo, a health care and insurance technology company that specializes in ICHRA administration.