Four Reasons Employers Should Self-Fund Their Health Benefits Now

One of the first steps employers should consider when creating a robust benefits strategy is getting “hands on the steering wheel” through self-funding their health benefits plans.  Well over 90% of large employers self-fund their plans.  Most groups choose this route based on one or more of the following logic streams.

First, it can be lower cost.   By eliminating the insurance company, the plan is able to recapture some of the profit and overhead costs borne by the insurance company.  The profit and overhead of the insurance carriers are frequently 20% of the plan cost.  This means an employer spending $1 million per year on health insurance could reduce its baseline cost to $800,000 (plus stop loss premium and administration).

As a word of caution, self-funding a health insurance plan can also cause higher cost in the right conditions.  If your population is very sick, uses healthcare frequently, or has a number of chronic illnesses, there is a possibility that you could spend as much or more than you would on a fully insured, traditional health plan.  Also, if a few unpredictable and large claims occur in a given year it could cause the plan to spend more than anticipated.  Hence, the significant upside does carry with it some risk.

Second, flexibility.  Many employers want to be able to offer benefits not available in the “canned” fully insured plans (in vitro fertilizations, adoption expenses, transgender operations, experimental treatments, etc.) and the only way to have control over your plan in a highly customized way is by self-funding your benefits.  For companies fighting hard to attract and retain talent, having a rich health plan with creative and innovative benefits is a great way to set themselves apart from the competition.

The downside of flexibility is having to make a variety of decisions.  Companies that are fully insured have very few decisions to make, because the decisions are already made for them.  When an employer has full control over its plan, there are thousands of options from which to choose about how they reward, motivate, and subsidize different healthcare choices from their population.  For instance, companies in control of their plans must choose an administrator and a stop loss vendor, or stick with the administrative services of a carrier.  Likewise, they must decide whether to include disease management, wellness programs, health savings accounts, nontraditional treatments, and more.  An unsophisticated human resources department will need to rely on a sophisticated, self-funding experienced health insurance broker when making these decisions.

Third, strategy.  Once employers are paying the claims themselves, they can directly benefit from savings that result from better decision making and outcomes in their employee population.  This means they can experiment with plan incentives, educate their employees, and take advantage of innovations to reduce the utilization of healthcare and get better outcomes.  Any improvements directly reduce the amounts employers spend on their healthcare, and can thus reduce the amount employees must contribute to have healthcare.

As with all things, there are good and bad strategies, and if a company puts in place incorrect incentives they can inadvertently lead to bad decision making in the population or employee resentment.  Major changes should be approached with care, thoughtfulness, and guidance.

Fourth, avoiding regulation.  The E.R.I.S.A. act of 1974 makes it so self-funded employers are regulated differently than fully insured plans.  This allows self-funded plans to avoid some laws that would apply to fully insured plans and provide more flexibility.  Regarding healthcare reform, self-funded plans avoid some of the requirements of healthcare reform as well, that apply only to insurance companies.

Companies generally should begin seriously investigating self-funding their health insurance once they begin growing in size and if they feel comfortable with the potential negatives described above.  While it is most typical to become self-funded at a few hundred employees, with the onset of ACA, many companies in the 20-50 life range are exploring self-funding their health plans[1].

[1] Pear, Robert “Some Employers Could Opt Out of Insurance Market, Raising Others’ Costs.” New York Times, February 17, 2013.