This blog is the first of a three-part series on self-funding. Download the full guide to self-funding your health plan here.
Between 1996 and 2015, U.S. healthcare spend rose nearly a trillion dollars. Add to that the ever-changing regulatory landscape, and you have a lot to factor into your benefits strategy. Rising healthcare costs and changes through health care reform have forced many organizations to dedicate more time to evaluating how their group health plans are funded – by self-funding or fully insured.
Many group health plans are fully insured, where your organization pays a monthly premium to the insurance company who “fully” owns the risk. Regardless of whether the premium covers the insurance company’s expenses, they are responsible for paying.
This option is popular, because it’s perceived as less risky and more stable due to the fixed monthly cost. There’s a misnomer that being insured keeps you at arm’s length from plan decisions and potential human resources nightmares. Some also argue that the administrative responsibilities also decrease when fully insured—perhaps. Yet, that would mean you have a complete understanding of self-funding, the other strategy available.
You, like many employers, may shy away from self-funding because it appears complex or even too risky. My goal is to take the mystery out of self-funding, so you can make an educated decision about what’s best for your team.
Understanding the Pros & Cons of Self-Funding
Self-funding is an alternative funding platform, where your organization assumes the financial risk associated with your group benefits. You’ll typically partner with a plan administrator, often referred to as a third-party administrator (TPA), which in some cases might be an insurance company. The key difference is your organization uses its own money, including the funds collected from employees through payroll deduction to cover the healthcare expenses incurred and administrative costs. There are clear pros and cons to self-funding over the fully insured platform.
- With a self-funded health plan, you are in control of the plan design and are often able to avoid state-mandated plan provisions that are otherwise without input.
- When claims expenses are low, your organization reaps the reward of the cash savings versus fully insured, where the insurance company wins.
- You control the overall risk management with what is known as stop loss insurance. This safeguards your organization in the event a claims expenditure exceeds a predetermined threshold, ensuring your cash flow is protected and avoiding unforeseen expenses from depleting the company assets.
- Financial advantages of self-funding include the elimination of a 2% premium tax and having full transparency in the administrative costs paid to the plan administrator for claims and customer service responsibilities.
- The insurance company reaps the benefits under a fully insured contract, which typically comes in two forms. One being the lower claims expenses for a period, and second, by way of contracted discounts with providers. In some cases, being self-funded means the network savings you have access to through the TPA is less than the discounts achieved by insurance carriers.
- For self-funded plans, cash flow can be unpredictable. Since your organization is paying claims expenses rather than a fixed monthly premium, the expenses can fluctuate from month to month and even year to year, especially if your group is unhealthy.
- There can also be a lag between when the expense is incurred by a plan participant and when the expense hits your books. If the expense is high dollar and eligible for reimbursement from your stop loss insurance, there may be a delay to you in recouping the money from the carrier.
Understanding Risk vs. Volatility
Like I’ve mentioned before, a self-funded plan has less predictability month-to-month in cash flow, which makes it more volatile than a fully insured plan. That doesn’t necessarily mean it is riskier. In fact, in many ways you can reduce your overall risk by taking on hills and valleys of the health plan.
There are strategies you can employ to hedge against risk. For example, all self-funded plans will have stop loss insurance to protect against excess loss for both individual claimants and the plan as a whole. You can also work with other partners, like stop loss captives and pharmacy benefits managers, to safeguard your plan.
Business leaders and plan sponsors do best when they have confidence and are in control of their strategy. Choosing a self-funded approach to a health plan provides the pathway needed to take control in a way that is simply not possible when fully insured. With the ability to tailor the plans, partners and cost containment strategies, leaders can take the mystery out of the “black box” of insurance. The investments in cost containment and approaches begin to show a more direct ROI (return on investment).
An example is the ability to choose a pharmacy benefits manager (PBM) that aligns with your financial and clinical best interests. When fully insured, partnerships like a PBM, are determined exclusively by the insurance company and may not fully align with your culture and goals. When self-funded you take on the challenge and opportunity to build the right fit to meet the organization’s financial, administrative and cultural goals.
Glancing at the Numbers
Part of your decision in choosing to go self-funding is analyzing the numbers. They break down into three basic buckets. Let’s take a look – and I promise I won’t make you do any math!
- Administrative fixed costs that are derived from fees paid to the TPA and network to administer and adjudicate claims of the plan – potentially fixed costs paid to a PBM. While these can very, they will make up the smallest piece of the overall cost pie of a self-funded plan.
- Reinsurance and stop loss premiums. An important financial protection for the plan sponsor that allows risk to be transferred to a reinsurer for claims that go above a specific amount per individual covered under the plan and an overall aggregate limit of claims per year. The stop loss market is dynamic and while it is not the largest portion of the costs, managing this closely by ensuring quality partners with favorable contract terms is key to protecting the financial status of the plan.
- Claims. This is where it gets interesting and can make up 80-90% of the plan costs. The decisions you make will determine how well your plan performs. As you gain more access to your plan’s claims as a self-funded plan, you will be able to use data from both carrier reporting and data analytics tools to develop strategies around controlling claims. First Person partners with Springbuk, a health analytics platform, to draw insights on gaps in care, clinical forecasting and claims benchmarking.
Analyzing Data to Make an Informed Decision
It’s important to partner with an advisor when considering self-funding to analyze the possibilities. Here are a few critical steps when determining if your organization should self-fund or not:
- If possible, review historical claims data and perform a lookback analysis to determine if self-funding would have created positive outcomes. This will not project future claims, but it will give you an idea as to the performance of the plan over the past few years.
- Gather historical claims, high-cost claimant and other data available to project future claims liability. It’s important to consider the health of your population and what outcomes are likely when self-funding. Compare these projected costs (and the maximum self-funded liability) to your fully insured premium to evaluate the potential cost savings opportunities. Last but not least, be sure to consider all costs including TPA fees, stop loss premiums and any other additional costs that would be associated with the preferred strategy (captives, PBMs, etc.).
- Evaluate future strategies that may create savings such as point solutions to help members manage conditions or a partnership with a third party administrator (TPA) or PBM. These additional levers are important to consider in your initial self-funded analysis.
- Determine your organization’s goals. Is having consistent cash flow at a potentially higher price more valuable than adding volatility and flexibility to the health plan strategy?
There is no one-size-fits-all solution to benefits. As you develop and refine your health and benefits strategy, be sure it is aligned with your organization’s strategic goals and objectives. Talk to a trusted advisor to see what funding option makes sense for you. Once you’ve decided you want to transition to self-funding, check out this blog on how the process works.
Or, check out the full guide to self-funding your health plan here.
If you have any questions about self-funding, feel free to reach out to me via email or LinkedIn. You can also drop us a line or Tweet at us! We love helping organizations optimize their benefits strategies and creating exceptional experiences for their employees.