Self-Insured 101: An In-Depth Look at Self-Funded Health Insurance

Self-funded health insurance, also known as self-insured, is becoming increasingly popular among employers to take control of their healthcare costs.

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Rather than paying premiums to an insurance company to cover their employees' medical expenses, self-insured employers assume the financial risk for their employees' healthcare expenses. This article provides an in-depth look at self-funded health insurance, including its advantages, risks, and challenges.

Understanding Self-Funded Health Insurance

Self-funded health insurance is a type of health insurance plan in which employers assume the financial risk for their employees' healthcare expenses. Rather than paying premiums to an insurance company to cover their employees’ claims, self-insured employers set aside funds to pay for smaller medical claims as they occur, and any money left over at the end of the year is a surplus to the employer.

Advantages of Self-Funded Health Insurance

There are several advantages to self-funded health insurance for employers. One key advantage is greater flexibility. Self-funded employers have more control over their healthcare benefits and can tailor their benefits to meet the specific needs of their employees. For example, self-funded employers can design their benefits to encourage employees to choose higher-quality, lower-cost providers, which can lead to substantial cost savings.

Another advantage of self-funded health insurance is the overall cost savings on optimal claims years. Self-funded employer’s typically pay lower administrative fees than traditional insurance plans because they are not paying for the overhead and profit margins of large carriers. Additionally, self-funded employers can save money by managing their healthcare expenses more efficiently through cost-containment programs. For example, self-funded employers can negotiate directly with healthcare providers to get lower rates for medical services.

Overall, self-funded health insurance gives employers greater control over healthcare spending with better transparency into where their money is going. Since self-funded employers assume the financial risk for their employees' healthcare expenses, they are motivated to control costs by promoting wellness programs, managing chronic conditions, and encouraging employees to use cost-effective medical services.

Risks and Challenges of Self-Funded Health Insurance

There are several challenges associated with self-funded health insurance, but the key to self-insured is stepping back to look at the larger picture of cost savings over multiple years.

One common risk is unexpected medical costs. Self-funded employers assume the financial risk for their employees' healthcare expenses, they may be liable for large medical claims that exceed their budget or projections. So, what happens if there is a large or catastrophic medical claim? Enter stop-loss insurance.

Stop-loss insurance goes into effect when a claim crosses a certain pre-determined threshold and essentially helps cover the employer’s risk in the event of extremely large claims. Aggregate stop-loss can also be purchased separately if an employer wants to shield themselves from a build up of smaller claims that become too much to cover (i.e. death by a thousand cuts).

Another risk is regulatory compliance. Self-funded employers are subject to federal regulations, including ERISA, which requires them to comply with certain reporting and disclosure requirements. Failure to comply with these regulations can result in fines and penalties.

Finally, self-funded health insurance can be administratively complex, which can be a challenge for small to mid-size employers with limited resources. Self-funded employers must manage their healthcare benefits, including claims processing, provider networks, and member services, which can require significant time and resources.

With the right employee benefits consultant, you will be well-equipped to manage these risks effectively to reap the financial benefits of transitioning to self-insured. At Renewal, we have helped many of our clients navigate the risks of switching to a self-funded plan, and many have experienced as much as a six-figure savings on health insurance in year one alone while adding better benefits for their employees.

The Role of Employee Benefits Captives

Employee benefits captives are an emerging solution for small to mid-size employers who want to manage the risks associated with self-funded health insurance. Employee benefits captives are insurance companies owned by a group of employers, or members, who share the financial risk for their employees' healthcare expenses. By pooling their resources and purchasing stop-loss insurance as a group, employers can spread the risk of unexpected medical costs and reduce their overall insurance and healthcare expenses.

Employee benefits captives also offer other benefits, including cost savings and enhanced control over healthcare benefits. Since these captives are owned by the participating employers, they can negotiate directly with healthcare providers to get lower rates for medical services. Additionally, because employee benefits captives are subject to state insurance regulations, they can provide additional protection for participating employers.

Conclusion

Self-funded health insurance can be a cost-effective and flexible option for employers who want to take control of their healthcare costs. However, self-funded health insurance also comes with risks and challenges. By understanding the advantages and disadvantages of self-funded health insurance, employers can make informed decisions about their healthcare benefits. Additionally, by exploring solutions like employee benefits captives, employers can mitigate the risks associated with self-funded health insurance and provide their employees with high-quality, cost-effective healthcare benefits.

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