Looking for ways to save on health care expenses? If you are a small employer with fewer than 100 employees, that search can be challenging. You want to minimize financial risk yet still offer competitive, comprehensive coverage.
In the past, most small employers relied on fully insured plans where the carrier took full responsibility for managing and paying claims. Self-funded health plans were limited to larger groups with the cash flow needed to administer the plan, pay claims and withstand high-dollar expenses. Now, smaller groups are looking to reap the potential cost savings self-funding can offer.
Increased control over your health care plan
When your health care plan is self-funded, you collect premiums from employees and fund claims directly. You are essentially acting as your own insurer and paying providers directly. Self-funding also gives you more control over your plan.
- You pay only for claims incurred by your employees.
- Stop-loss coverage protects you from assuming full financial risk.
- You have more control over plan design and may monitor utilization.
- Reporting is readily available; you can obtain specific claims reports and understand how your money is being spent.
- Operating costs may be lower.
- You are exempt from state-mandated benefits.
Self-funded plans can be customized but must still follow the Employee Retirement Income Security Act (ERISA). ERISA is a broad federal law that ensures employees are offered certain benefits protections, including continuation of coverage when they terminate their employment. You are also responsible for all aspects of the plan, including administrative costs, eligibility management and compliance.
Get the help you need
Often, groups hire a third-party administrator (TPA) to help them analyze and manage the plan. TPA services can include:
- Creating an effective plan design
- Setting and collecting premiums
- Paying claims and managing stop-loss
- Acting as an intermediary between the employer and outside vendors like network administrators and pharmacy benefit managers
Additional services, such as completing open enrollment and providing customer service to employees, may also be available.
Manage your risk
As a small employer choosing to self-fund your health plan, you will most likely need to purchase stop-loss insurance. This coverage helps limit the dollar amount of claims for which you are responsible during the plan year. It can also help cover the risk of large and unexpected claims.
- Specific stop-loss: Also called individual stop-loss, this coverage protects you when employees have unexpected high-dollar or catastrophic claims. Your broker and your stop-loss carrier will work with you to determine the appropriate amount of coverage for your group. Most carriers offer individual stop-loss from $10,000 to $75,000.
Here’s how it works: If you purchase specific stop-loss in the amount of $35,000 and one of your employees has a $140,000 hospital bill, you would be responsible for $35,000 and the stop-loss would cover the remaining $105,000 ($140,000 – $35,000 = $105,000). If that same employee has additional claims during the plan year, the stop-loss would continue to cover all eligible claims in full.
- Aggregate stop-loss: This stop-loss provides you with coverage for the entire group. Standard stop-loss for groups is typically 20-25% higher than your expected claims. Your broker will work with you and the stop-loss carrier to make sure your contract pays or reimburses you in a timely manner for all expenses covered by the policy.
Here’s how it works: Your stop-loss carrier determines your group’s maximum claims liability (attachment point) is $550,000. If your claims for the plan year are $750,000, the stop-loss carrier would cover the remaining eligible charges of $200,000 ($750,000 – $550,000 = $200,000).
It is possible to start a self-funded plan with only aggregate stop-loss coverage. As you begin to build your claims reserve (money collected in premium but not paid out for claims), it may not make sense to purchase a stop-loss policy with a low threshold for individuals. Your aggregate attachment point will cover you. Be sure to talk to your broker or benefits adviser if you are considering this option.
Ease the transition with level-funding
There are hybrid plans available to small groups that offer the financial benefits of self-insured plans while minimizing risk. These level-funded plans require you to pay a fixed monthly premium to cover:
- Plan administration
- Stop-loss insurance
- Claims funding
At the end of the year, if your claims are less than the premium collected, the carrier refunds either all or a portion of the overpayment. If your claims are more than the premium collected, most carriers do not require reimbursement of the funds advanced by the carrier. However, in this case, renewal rates are likely to increase to cover the carrier’s loss.
Participating in a level-funded plan can help you evaluate your tolerance for risk. It can also give you a year or two of real claims experience that shows exactly how much your employees are using the plan and what your claims liability truly is.
A few words of caution
Self-funding can offer small groups significant savings and more predictable renewal increases. However, it’s not for everyone. For example, groups with older employees or those that have ongoing health issues such as cancer, heart disease and rheumatoid arthritis may not be a good fit because of high prescription drug claims and ongoing treatment.
Here are some of the advantages and disadvantages of a self-funded plan.
- Advantages
- Premiums are based on your group’s health.
- You pay only your group’s actual claims.
- Detailed reporting gives you a clear view of the plan and where claims dollars are being spent.
- You may avoid premium taxes, state-mandated coverage and certain Affordable Care Act (ACA)-related fees.
- Implementing a wellness plan, case management and utilization review may have an additional positive impact on claims.
- Disadvantages
- You are financially responsible for all claims.
- Administrative and stop-loss fees can be high and diminish the potential cost savings of a self insured plan.
- Not all carriers work with all small groups. Due to the size of your group, you may have to work with a new carrier.
- You may be responsible for completing and distributing additional tax forms, such as a Form 5500.
Implementing a self-funded plan
Moving to a self-funded plan is a big decision that impacts the health and wealth of your group both long- and short-term. Before you take the leap, be sure to talk to your broker or benefits adviser to make sure you have the coverages and processes in place to make self-funding a viable and successful funding alternative for you.
Your broker or benefits adviser can explain the budgeting required to sustain a self-funded plan and support you through the implementation. As you weigh your options, it’s important to have a partner that can:
- Assess your employee population
- Age
- Health
- Determine your risk tolerance
- High
- Low
- Evaluate the different plans available
- Level-funded
- Carrier-sponsored
- TPA-administered
With the right help, you can launch a self-funded plan that provides your group with a cost-effective program and offers employees access to the care they need. With the right partners and preparation, the transition can be smooth and rewarding. Our OneGroup Employee Benefits team can help you decide if self-funding health benefits is the best model for your business and guide you in the right direction.
This content is for informational purposes only and not for the purpose of providing professional, financial, medical or legaladvice. You should contact your licensed professional to obtain advice with respect to any particular issue or problem.
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