In light of ACA regulations, more companies and their HR departments are considering an alternative to the routine medical plans previously offered. Adopting a self-funded medical plan may be new for many, however this concept has been around for decades. Years ago, only large companies could afford the cash flow requirements of a self-funded medical plan. With changes in the insurance carrier market, groups with as few as ten employees can now take advantage of this strategy to self-fund their medical plans. In this article, we will introduce you to what self-funding means, who it’s for and how it works.
What type of company is an ideal candidate?
Any type of company can adopt one of these plans and take advantage of the benefits of self-funding. Summit represents clients with fewer than twenty employees, companies with thousands of employees and everything in between. When the c-suite gets frustrated with the status quo of double digit increases in their benefit costs and when they feel as though they have NO control, that’s when they are ready to make a new decision and take control of their healthcare spend.
Why is self-funding important for your company?
A self-funded medical plan offers three advantages – creative control, communication/information and cost reduction.
Creative control. Fully insured medical plans through carriers like Blue Cross Blue Shield, United Healthcare, CIGNA and Aetna offer few options outside of the metallic plans (platinum, gold, silver and bronze) with no cost control incentives and no creative solutions to rising medical costs. With self-funded plans, bariatric surgery is not covered in most fully insured plans. However, if a company wishes to have such a procedure covered in its self-funded plan, within regulatory guidelines, almost anything can be included or excluded from coverage.
Communication. Unless it is state-mandated, most insurance carriers don’t provide detailed reports or information to their clients about what, when and how the claims dollars are spent. On a month-to-month basis, self-funded plans provide a wealth of information about the claims dollars, including the prescription drug spend that can account for 20-30% of the total monthly claims. This type of detailed information shows trends in medical spending and can reveal ways the company can adjust the plan to incentivize better behavior. This information can help modify behavior and save money for both the participants and the company.
Cost reductions. Control and communication can help save money, yet the very nature of self-funding allows a company to bend the cost curve. In any medical plan – both fully funded and self-funded – the premiums cover not only claims but also the administrative costs. Typically, roughly two-thirds of the annual premiums in a fully insured plan are used for claims, with one-third going to administrative costs. In a fully insured plan with any of the national carriers, money leftover in the claims bucket is returned to the carrier at the end of the year. If the claims bucket is overspent, money is lost. However, carriers are good at estimating their costs, and when they miss it, your company gets a large renewal number. In a self-funded plan, any unspent claims money is in a bank account for the company. This money can be spent on future claims, used to lower premiums or to enhance the plan’s benefits. If claims exceed the amount of money in the claims bucket, there are two levels of insurance, also known as reinsurance, that protect the plan, the participants and the company’s cash flow.
How do these types of plans work?
Fully insured and self-funded plans operate in the same way: both provide a network of doctors and facilities, issue ID cards and EOB’s, pay claims, incorporate a pharmacy management system to provide prescriptions and provide customer service for members. The fully insured carriers act as a third-party administrator while a self-funded client hires an independent third-party administrator. Both types have the security and safety net of reinsurance protection in case of shock claims or a catastrophic loss.
While there are many similarities, the biggest difference is transparency. The fully insured carriers have all these items bundled in their system, the client never sees this nor can they change any of the pieces to gain efficiencies, reduce costs or adopt cost control measures. Yet with the self-funded model everything is unbundled, with the company choosing the best-in-class portions that provide the right set-up for particular needs or goals. The independent third-party administrator advises the company about their choices and can change various pieces to enhance the plan or motivate the desired behavior.
As businesses and regulations evolve, so do medical coverage options. While self-funding may not be for every business, it is an option CEOs, CFOs and business owners should consider. If you would like to learn more about how self-funding can help your organization, please contact Summit. One of our knowledgeable representatives will answer your questions and provide additional information to help you find the right fit for your company goals and needs.
Chief Marketing Officer
Troy Reichert is not affiliated with Cetera Advisor Networks LLC.