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Medical Benefits: Fully Fund or Self-Insure - What’s Right for Your Company?

The quality of an employer’s benefits package often determines whether a job candidate will join a company or not. It can also be a key factor in keeping existing employees happy. Without a doubt, the most desired benefit is health insurance.

In a 2013 study from the Society for Human Resource Management, 88% of workers said that employer-provided health insurance is extremely, or very important – far more than any other workplace benefit. For sure the onus is on employers to correctly play the health care insurance card—it’s not only a matter of satisfying employees, but also watching the bottom line.  According to the Kaiser Family Foundation and the Health Research & Educational Trust (HRET) 2014 Employer Health Benefits Survey, employer-sponsored family health coverage increased 3% to $16,834, with workers contributing $4,823 on average.

Companies continue to look for ways to curb health costs, including looking afresh at self-funding medical insurance instead of a traditional, fully funded plan. In a self-funded health plan, the plan sponsor/employer pays the cost and assumes the financial risk for participants’ health care expenses. Employers seeking a ceiling on this risk will purchase stop-loss coverage which helps employers manage high claims.  By comparison, with a fully insured plan, a fixed monthly premium is paid and the carrier assumes the responsibility and risk.

“Roughly 75% of our clients are self-funded. The decision to move a company’s plan from a traditional fully-insured plan to a self-funded plan is primarily a financial decision, but needs to account for the organization’s corporate culture as well,” says Billy Grossmiller, a corporate benefits consultant with CrawfordAdvisors.

The financial impetus is there. According to George Gonser, Jr., a partner with Spring Consulting Group, self-funding health insurance can result in savings of 8-10% off of fully insured premiums. That alone is enough to create a dilemma – to fully fund or self-insure?

What you need to know about self-funding

There are plenty of pluses when it comes to self-funding.

Count the savings. A self-funded plan is not required to pay the Affordable Care Act’s (ACA) Health Insurance Tax (HIT). The HIT applies to employers with fully insured insurance plans and cost employers approximately 2.5% of premiums. The ACA also created the “modified community rate,” which is a major cost driver which subsidizes the most expensive part of the population by raising the medical premiums of the average- to low-risk population. Self-funding allows an employer to opt out of community rating and be judged on its own risk factors, explains Matt Thomas, president of WorkSmart Systems, a professional employer organization.

In a fully insured funding arrangement, state premium taxes apply to the entire premium. If you self-insure, state premium taxes are not applied to the administrative or claim charges, leading to savings, points out Skip Woody, a partner with Hill, Chesson & Woody, which specializes in employee benefits.

The hot trend is for companies to implement wellness programs. However, fully insured companies can lose some of those savings since their rate may be blended with the insurance company’s book of business. In a self-funded arrangement, the employer gets to realize the direct savings of their wellness program.

Customize. When a company self-insures there is tremendous flexibility and control. Abe Gutfreud, senior vice president of Singer Nelson Charlmers, a risk strategies company points out some of the opportunities. Companies can customize benefit plans to meet the specific needs of their employees and avoid unneeded costly state benefit mandates. Companies can create their own wellness initiatives and technology tools that help employees be smarter shoppers for health care services that may be more effective for their employees than just hoping an insurance company’s generic programs work. Companies with multiple locations have the flexibility of using different independent provider networks that may be more suitable for a specific location, even if all employees have the same plans. Companies can decide their own employee contribution strategies and participation thresholds without being forced to follow the insurance company’s requirements.

There is much to gain from self-insuring, but it’s not a cure-all.

Challenges for small and medium-sized companies

“Although the advantages of self-funding are extremely enticing, one must remember some of the challenges that are faced by small and mid-sized companies when they decide to self-fund,” says Grossmiller.

For example, do they have the internal resources, personnel with specialized expertise to manage and administer self-funded plans? If they experience large cost fluctuations due the unpredictability of the timing of claims, what will the impact be on their business? Is their business healthy enough to take on the financial risk inherent in self-funding?

“The good news is that a company can meet these challenges with accurate claims administration, appropriate risk management strategies and effective plan design,” he says.

However, some argue that self-funding is primarily for big corporations. “Self-funding shouldn’t be gone into without careful consideration, especially for employers under 1,000 employees, it’s a gamble,” says Rudy Garcia, president of Qandun Insurance Agency.

When a company self-insures there is added fiduciary and legal responsibility.

Self-funded plans by nature are subject to cost fluctuations, (a good claims month vs. a horrible claims month) that most employers are not used to dealing with from a budget perspective.

Furthermore, self-funded plans can be more complex to organize and analyze. The average employer does not have the expertise to do this work. “If they do not contract with vendors that are extremely competent, the employer can end up buying a product they do not understand, that could be detrimental to the business and employees,” warns Thomas.

The decision

When all the pros and cons are weighed, should a company do what’s best for their bottom line or their employees?

“You can do both. To self-insure does not mean you are providing lesser coverage. There usually is no difference, and in many cases, self-insurance could provide better coverage, not worse,” says David Lewis, founder of OperationsInc., a HR consulting company.

Benefits are a way to attract and retrain top talent, and savvy employers will choose to share the financial benefits of self-funding with employees.

If you decide to self-fund, there are ways to mitigate some costs.

Expect the worse. Costs to treat transplants can range from $260,000 for a kidney to more than $1 million for a heart-lung transplant, says Sam Fleet, president of AmWINS Group Benefits. “Have a separate policy to cover these expensive life saving procedures to protect your company from unexpected costs.”

Cut drug expenses. With almost 300 drugs classified as “specialty” pharmaceuticals and ranging in costs from $5,000-$300,000 for an annual supply, contracting with a pharmaceutical benefits management team will reduce costs by obtaining discounts and eliminating the “buy and bill” approach that allows doctors to charge a mark-up.

Work with specialists. Fleet estimates a typical dialysis case can cost up to $50,000 per month and put self-funded employers in a tight spot financially. Work with dialysis management specialists to help control costs by invoking “usual and reasonable” rates to reduce invoices, and helping arrange for home dialysis when appropriate and obtaining drug discounts.

Frankly, says Garcia, “Right now self-insurance is being offered like it’s the next big and newest thing, but it’s been around a very long time. There’s a lot of hype selling going on, and many companies will get hurt financially if they are not careful. Be careful.”

 

Sheryl Nance-Nash is a freelance writer specializing in personal finance, small business, general business, and career-related topics.

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