Each year, the cost of your health insurance premium is rising. Rather than sitting helplessly on the sidelines, why not manage the expense with a modified self-funding arrangement instead of your traditional fully insured program?
Modified self-funding arrangements are not just for large companies. Organizations of all sizes can benefit from paying their own claims and capping their exposure.
In addition, with the current health care environment, now is the time to consider taking premium costs into your own hands, says Michael Bartolini, vice president and business practice manager at First Commonwealth Insurance Agency, a division of First Commonwealth Advisors.
“A fully insured arrangement means that the insurance company is taking on all of the risk, and the employer pays the set premium regardless of the company’s claims performance,” Bartolini says. “If the insurance carrier is taking on the risk, its rating development is performed more conservatively than may be appropriate. There is no better time than now to really dig in and determine if a modified self-funding arrangement could create an opportunity to return dollars back to your bottom line.”
Smart Business spoke with Bartolini about how a modified self-funding arrangement works and how to determine if it is the right solution for your business.
How does a modified self-funding arrangement work?
In many ways, a modified self-funding arrangement is paying your own insurance claims while capping the risk/exposure at a point where you feel comfortable. The real cost of this type of arrangement can be figured by adding up claims, stop loss insurance and administrative costs. The result creates a medical benefits program that caps exposure for each employee.
The arrangement is called modified self-funding because you are not alone on an island of risk; your losses are capped at a comfortable level, so you will not go bankrupt from paying an inordinate amount of claims for any one individual.
Why don’t more companies take advantage of the modified self-funding structure?
First, a lot of companies believe that this arrangement is too risky or that their companies are too small. But because you cap your losses, this is not the case.
Second, companies might not have the cash flow to fund the plan. While this is a legitimate concern for struggling organizations, by capping losses, your company could spend less out-of-pocket each month in the long run compared to a fully insured plan.
Ask yourself this: What are your claims trends? What is your plan utilization? Are your numbers lower than an insurance carrier’s medical inflation rates? If yes, a modified self-funding plan may be for you.
What type of company is a candidate for a modified self-funding arrangement?
This method of medical insurance funding is ideal for a company that is willing to take on some risk and to think outside the box. Also, the company should have a culture of strong health care consumerism.
There should be an emphasis on preventive health and wellness, with programs in place that encourage workers to take care of themselves and assume responsibility for their health care.
In environments where employees participate in behavior changes that promote wellness and understand the true cost of health care, plan utilization tends to be lower. In these scenarios, a modified self-funding plan can reduce expenses because the organization’s claims history is likely better than the average and the total costs of a self-funded arrangement could be less than an insurance carrier’s offering.
What is involved in setting up a modified self-funding arrangement?
First, partner with a consultant who can help you take a look at historical claims and determine the risk picture at your company. After a consultant assists with reviewing your claims history, a decision is made on where to capture exposure, based on health care utilization.
Then, secure an administrative service proposal from an insurance carrier to determine the cost of adjudicating the claims. Next, consult with a stop loss provider and get a proposal for the appropriate loss cap level per individual insured in the employee group (called a specific). From there, an aggregate stop loss proposal is secured to protect the company should there be a lot of claims by many individuals in the employee group.
If your current health insurance carrier is issuing premium increases in the single digits, this could be a sign that your claims history is such that a modified self-funding plan could save you money, as a low rate of increase likely shows that your company is a good risk.
Finally, do not be misled into thinking that your company is too small or that this type of arrangement is too risky. In reality, this structure can provide a real opportunity to put money back toward your bottom line and save more on health care expenses in an uncertain economic environment.
Michael Bartolini is vice president and business practice manager at First Commonwealth Insurance Agency, a division of First Commonwealth Advisors. Reach him at [email protected] or (724) 349-6028.