Self-Funding Basics – Part One

Health care costs have risen sharply over the last decade, and 2022 is looking to be no different: a Willis Towers Watson study based on responses from US employers projected a 5 percent premium increase this year. As employers look to achieve cost savings – all while trying to tackle “The Great Resignation” and maintain a high degree of care for their employees – many have shifted toward a self-funded or self-insured healthcare model.

But what is self-funding, and why would an employer consider it? Read on for the first of our three-part series highlighting this healthcare model.

What is self-funding?

In self-funded (or self-insured) health plans, employers adopt the financial risk for providing health benefits to employees. The employer sponsoring a self-funded plan will pay actual claims costs incurred by the covered persons enrolled in the plan, which varies from month to month, as opposed to fixed premiums to an insurance company. Typically, the employer contracts with a third-party administrator (TPA) to manage the plan and costs.

What is the difference between self-funding and traditional health insurance?

The main difference is who assumes the risk – in a traditional model, an employer would pay an insurance company a premium, and then the insurance company would cover claims. In a self-funded model, the employer assumes the claims risk and pays claim costs out-of-pocket.

What are the advantages and disadvantages of self-funding?

Self-funding has a number of advantages. Employers can customize their plans to meet the needs of their specific workforce, and are free to contract with providers and provider networks they deem best suited for their group. They also maintain control over healthcare reserves and cash flow, and are not subject to state health insurance regulations/benefit mandates and state health insurance premium taxes (note that federal laws and regulations still apply). The main disadvantage is, of course, the risk of unknown, unexpected, large claims – which would be the financial responsibility of the employer. Almost all self-funded groups will purchase stop loss insurance coverage to help minimize this risk.

Who is a good candidate for self-funding?

While self-funding has historically been seen in larger employer groups, employers of all sizes should consider self-funding if they wish for greater control over the cost and plan design of their healthcare benefits. Employers with a stable employee base (low turnover), a healthy cash flow, and better than average claims conditions often see the most advantages in switching to a self-funded plan.

BCS can help determine whether self-funding is appropriate for you. Contact us today.