Tag Archives: Self Funded Plans

Barriers to Self-Funding: Why Don’t More Employers Self Fund Their Health Insurance?

An alternative title to this article might also be “why certain employers should not self-fund their insurance plans.”  When companies of a larger size first explore self-funding their health insurance plans, it appears to be an easy financial decision; yet making the change requires overcoming a number of hurdles.  (For the reasons why an employer should self-fund its health plan, see an earlier post here Four Reasons to Self-Fund Your Benefits Now). This article will illustrate the obstacles, both systemic and external, that inhibit employers from self-funding their health insurance benefits, and illustrate thoughts about overcoming these obstacles.

Systemic

First, it’s easy.  Fully insuring a population with health insurance is extremely simple, just buy a pre-packaged plan from a broker and it will cover the population.  Select a few coverage items from a list, such as the deductible, and it is finished until renewal.  Just remember that when large employers with relatively average-health populations (or better) are fully insured, they are probably overpaying (potentially significantly) for this ease.

Second, it’s predictable (in 12 month segments).  An employer buying a fully insured health plan knows exactly what it will cost each month of the year, no matter how many surprises come or operations occur.  This is a short term predictability, however, because the prices change every 12 months at renewal.

Third, fully insuring is an excellent choice for unhealthy populations.  Although the majority of benefits strategies hinge on employers being able to manage the risk of their own populations, sometimes the situation is beyond saving.  If the population of employees is aging, obese, and/or chronically ill, the claims utilization may be quite high.  This can be so extreme that if the employer were paying the claims it would be far worse than having the population be part of a large risk pool, where the insurance company takes the losses instead of the employer.

Fourth, it works best for large populations.  There is no rule that says a company must have “X” number of employees to make the leap to self-funding its employees.  The idea is, however, that the larger a population, the more it is able to balance risk across it.  Hence, if only 10 employees are on a plan, a single big accident could drive losses greater than a decade of premiums.  If the plan has 1,000 employees, the likelihood of a single incident driving huge losses declines dramatically.  Recent articles have indicated that more and more, companies with fewer than 50 employees are making the jump to self-funding their insurance plans because of anticipated cost increases due to ACA, especially for employers with healthy populations.

External

Fifth, it can be hard to get stop loss insurance.  When a company wants to self-fund its benefits plan, it needs to purchase stop-loss insurance to provide a backstop against catastrophic claims.  These stop-loss carriers need to have claims data and totals so they can price the stop loss insurance accordingly (e.g. a young, healthy population needs a low price, an old, chronically ill population should have a higher price).  The stop loss carrier is not gauging the elderly and sick, it just needs to price the insurance properly so it can stay in business.  Without any data (which will be very hard to get from the insurance company) the stop loss insurance will price the insurance higher in order to be cautious and make up for the business risk of taking a gamble.  There are many ways to get around this hurdle, from buying stop loss from a general agent who specializes in fully insured conversions to doing a semi-self-funded policy with the carrier.  See this post How to Get Stop Loss Insurance if You are Fully Insured for details.

Sixth, insurance companies make more money on fully insured plans.  By some estimates it requires 3-5 self-funded health insurance plans to earn the same money for an insurance company as a single fully insured plan.  Because of this, there is a strong financial disincentive for insurance companies to have your plan be self insured.

Seventh, insurance companies pay more commission to the broker on fully insured plans.  Not all brokers work on commission; some work for a flat, transparent fee or a monthly subscription, or hourly.  However, a large preponderance of health insurance brokers are paid by commissions from carriers.  These commissions are materially higher if the broker has an employer group on a fully insured plan than they are on a self-funded plan.  Most brokers will still do what is in the best interest of the client, but if the client doesn’t ask to be self-funded, it’s not a wonder that the broker may not push for it: more work, less pay.

Self-funding an employee population is the right answer for over 90% of large employers, and 60% of all employees in the United States[1].  Nevertheless, there are still tens of thousands of businesses on fully insured plans who could reap major savings by making the switch.  Doing so is a long term commitment, and will require some work to get the benefits, but the effort in many cases is well worth it.


[1] Thomas, Katie. “Self Insured Complicate Health Deal.” New York Times. February 15, 2012

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.