Health care costs continue to rise, and companies continue to respond by shifting costs through higher deductibles and co-payments and increasing premiums charged to employees for coverage, asking your employees in effect to self-insure an ever greater percentage of their health care costs.
With no signs of healthcare inflation slowing, employers are doing everything possible to uncover ways to control costs. For employers who sponsor a fully insured plan, a major opportunity to decrease costs exists by considering whether or not to self-fund or partially self-fund their plan. Employers may be able to achieve significant savings depending upon their current situation.
Savings Opportunities
There are many reasons employers choose to self-insure. Self-funded employers have more plan design flexibility than their insured counterparts since they are not subject to state mandated coverage. Self-funding also allows employers to better understand the individual cost components of their plan by separating out administrative costs, and other additional expenses included in the premium. In addition, moving to a self-insured program can translate into an immediate savings by avoiding the following taxes/fees required on fully insured programs including:
• Health Insurance Industry Tax – The Affordable Care Act imposes a Health Insurance Industry Tax, which is a tax on insurance companies for expected gains from increased enrollment realized from health care reform. Most, if not all, insured plans, load this fee into the insured plan premiums and is estimated to be an increase of 3% to 4% of the total premium each year.
• State Premium Taxes – Many states include a premium tax on health insurance that is passed along to fully insured employers in the form of higher premiums. Typically this tax can run up to 3% of the premium.
• Lowering of Administrative and Risk Charges – Fully insured premiums include expenses for marketing and new business sales that can run up to 4% depending upon the carrier involved. These charges are not found in a self-funded plan other than a small amount included in stop-loss insurance should an employer choose to purchase.
In addition to the “hard” dollar savings realized above, employers can also save by receiving a cash flow advantage by holding claim dollars until they are incurred, and avoid any state mandated benefits that might be required.
Employers may find that in their quest to manage long-term health care costs, there are no greater savings opportunities than to realize the benefits of having positive claim experience and lowering the overall cost of the program. Moving to self-funding allows employers access to their claim information. Such access is usually not possible in a fully insured environment. Many employers are using the savings realized above to fund more innovative and targeted wellness and other health care interventions to improve the overall health of their employees having the benefit of not only lowering the company’s health care costs, but improving the productivity of employees within the organization.
Is Self-Funding Right for My Organization?
Self-funding of the health benefit program is not the best solution for every employer. Even though companies with as few as 100 employees have moved to self-funding, each employer must assess their ability and desire to assume the risk of paying for the health care claim costs of their employees.
Companies must consider whether its work force is stable enough and if it has sufficient cash flow to allow the organization to predict and cover the costs of claims incurred by its health benefit plan participants.
When moving to self-funding, employers must be willing to actively manage eligibility for benefits and payment of claims and expenses as well as deciding upon the level of risk they are willing to take. Moving to self-funding is not a guarantee that there will be cost reductions every year, or at all. Many employers limit their exposure by partially self-insuring their plan through the purchase of stop-loss coverage. The employer must be comfortable in trading the security of a fully insured plan for a funding strategy where actual costs could exceed the cost of a fully insured plan in any given year. Looking at self-funding as a long-term investment in managing costs to can smooth out years when costs are greater than expected.
Any employer considering self-funding, has many issues to consider. For employers who are currently fully insured, a change to self-insured will require changes to their accounting, banking, and administrative procedures and expertise such as consulting advice, actuarial support and data analysis. While all of these services require additional expense, the savings and benefits of self-funding may far outweigh the cost giving employers another tool in its arsenal to manage health care costs.
At UBF, our consulting team has helped many employers determine whether or not self-funding is right for them and provide support not only in making the decision to self-insure, but during each step of the implementation, to insure decisions are made on a timely basis and are understood by the appropriate part of your organization.
Please contact us if we can be of assistance to your company or if you have any questions about whether self-funding is right for your organization.
Allan Phillips is a Managing Principal at UBF and has over 25 years experience as a senior health care and pension consultant. He has worked with Fortune 50, 500 and mid-size companies to assess, develop, and implement integrated benefits programs for global organizations.