There are two predominant options for health plan funding in the marketplace: the traditional, fully funded option, and the self-funded model.
While most people think of the fully funded option when they think of insurance, Don Whitford, vice president of sales at Priority Health, says self-funding may be a better option for some employers.
“It really depends upon how much risk you’re willing to assume,” Whitford says.
Smart Business spoke with Whitford about the options available for funding a health plan and how to determine which one is right for your company.
How does fully funded insurance work?
In the fully funded model, the health plan owns all the risk. Companies are placed in the same pool, and each one pays a premium throughout the year. Whether you use more benefits or fewer than you paid, there is no settlement with the individual employer. There is no gain or loss; some years you use more benefits than your premium and other years you pay less than you use.
That’s your classic insurance concept, and it works marvelously for smaller groups. If you are a small company, you can’t afford to assume the risk because one particular claim could bankrupt an organization. Generally, employers that have fewer than 100 employees get into fully funded arrangements because they don’t want to assume the risk.
How does self-funding differ from a fully funded plan?
Self-funding is significantly different because the employer assumes the risk of its health care benefits to a certain level. Most carriers offer secondary insurance called stop-loss protection, which caps your exposure, protecting you from catastrophic events.
There are a lot of advantages for employers using a self-funded plan. First, they are responsible for their own risk. Second, they have greater flexibility on the benefit design they can offer.
Self-funding is subject to governmental regulations under the Employee Retirement Income Security Act of 1974 (ERISA), a federal law that sets minimum standards for health plans in private industry. One advantage employers find with self-funding is that they are not subject to state-mandated benefits. This provides greater flexibility in benefit design. So if they don’t want to cover those specific state-mandated benefits, they can self-fund.
What do employers considering self-funding need to know?
It’s important to look at carriers in a different light. The services a carrier offers in self-funding is critical. If you think of self-funding from a cost perspective, there are two components: variable costs and fixed costs.
On the fixed-cost side, you have an administrative fee, a cost for the carrier to administer the services of the membership. You also have your stop-loss premium as a fixed fee. Normally, the fixed-cost component is about 15 percent of the employer’s total cost.
The real cost driver is the variable cost — the actual claims expense, which accounts for 85 percent of the cost structure. That’s where carriers that manage per-capita cost succeed because the total cost is controlled. Select a carrier with proven care management programs, which are the best way to eliminate unnecessary care, versus one that focuses on discounts. Would you rather have a carrier that eliminates unnecessary care, or one that pays a lesser amount on unnecessary care?
