This is the big question employers ask themselves, or at least they should be.
In today’s employee benefits space, many small to medium sized businesses are being negatively impacted by the mandates associated with the Affordable Care Act (here-on-out referred to as the ACA). Companies might be seeing fewer insurance companies to choose from, higher prices, smaller doctor networks, or all of the above. In this chaotic environment, many employers are looking at different approaches to their health insurance programs, and one important alternative to consider is self-funding. This approach can help lower costs, get you away from the 3-4% tax on health insurance, and many of the other mandates that the government is requiring through the ACA.
What is Self-Funding?
Self-funding is, at the simplest level, a different way to setup your insurance programs (you can self-fund things other than health). In a traditional fully-insured environment, a company/individual enters into what is typically a 12-month contract for a particular health plan and the insurance company takes on all claims liability. This is the environment that most small businesses occupy and have been operating in for some time.
The difference in this and self-funding is simply that in the self-funding environment, the employer is responsible for a predetermined portion of the claims that are processed. Depending on how the plan is set up, if there are less claims than what were allocated for, the company would either get their claims money back if they paid it in upfront or they wouldn’t pay the claims at all. Either way, the company saves when claims are not incurred. In the fully insured world, the insurance company profits when claims are not incurred.
Why should I care?
Let’s take a step back, let’s say to January 2013 before the ACA was law. At this time, most insurance companies would require employees or employers to answer health questions so that they could set pricing at a level they felt was appropriate based on the population’s health risk. Fast forward to January 2014. Insurance companies are no longer allowed to ask health questions in the individual and small group markets. What did this do? It caused rates in these markets to skyrocket. It also caused many insurance companies to exit the employee benefits arena all together. CIGNA, Guardian, Principal, Assurant, UnitedHealthcare and many others have all exited or are planning on exiting different market segments due to the ACA. Even worse, for the insurance companies who still have fully insured products in these markets, rates have continued to go up and what we are seeing now is the shrinking of provider networks.
So, back to self-funding. In today’s environment, the post-apocalyptic ACA environment, many insurance companies and administrators have recognized the strain the ACA is putting on businesses so they have created programs that look and feel like a traditional fully insured program, but they have a self-funding component built in. A company still pays their monthly premiums (a combination of admin costs and their predetermined claims amounts) and the insurance administrator processes all the claims on their end. These programs are often referred to as Level Funded since costs do not fluctuate based on claims.
There are many reasons for employers to consider self-funded options and while most are considering them just because they are running out of options or their fully insured rates have gone through the roof, there are several other reasons to consider this type of program. We do recommend all employers at least consider self-funding unless they know for a fact that they have an unhealthy population and could not make it through underwriting.
Benefits of Self-Funding:
- Rates are typically 20 – 30% lower than fully insured rates
- More flexibility on plan design and doctor networks
- More insurance companies/administrators to consider
- Potential refunds from the insurance provider if plan year runs well
- Usually instant/online access to claims and utilization info
While there are many positives to this approach, there are a few negatives as well. They tie mainly into the admin and setup of the program.
Detriments of Self-Funding:
- More lead time required as there are longer quoting/install times
- Employees are required to answer health questions
- Contracts cannot be terminated early
- Note: If you can’t commit for 12 months, don’t even consider it
- Your company can be declined if you do not make it through the medial underwriting
- Note: This is what helps keep these programs affordable
Many small business owners are caught up in the day-to-day of their business and are not planners. If that’s the case for you (or your boss), this approach may not work. This is something that takes some coordination and also something you will want to put into place with a broker or agent who has experience in this space. The last thing you want to do is put a contract in place that you do not understand and then have your company be tied into something for 12 months.
The point of our story and what we hope everyone gets out of this is as follows; self-funding is a viable option that all employers, in our opinion, should at least consider. Over the last 3–4 years as rates have gone through the roof in the fully insured world, almost all insurance companies and many insurance administrators have started self-funding options for the same small and medium businesses whose costs are being negatively impacted by the ACA taxes and mandates. If you would like to learn more about self-funding or discuss this approach in detail, please reach out and Holloway would be happy to help you see if this approach would be right for you.