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Self-funding is when an employer either administers the plan in-house or contracts with a Third Party Administration (TPA) firm to do the administrative services; in either case, it knows the exact cost of administration.
Market competition and Federal law (ERISA) require the Plan Administrator to know exactly what is spent on every aspect of administration which keeps the costs to the lowest efficient amount possible. |
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For the past two decades, health care costs have been the fastest growing component of the corporate budget.
There are many causes of this double-digit rise, including new costly medical technology, personal lifestyle habits, cost shifting from government programs and the aging of the population. There are also many strategies employers have implemented to reduce the impact of run-away costs. Smart employers have combined cost management strategies with self-funding to hold benefit costs to a minimum.
Over 65% of U.S. employers effectuated some form of self-funding for their medical benefit program in 1991. That percentage has increased steadily over the past decade as employers have realized the strong positives self-funding offers in helping control costs.
More and more companies are turning to self-funding to avoid unnecessary charges and costs and to gain control over health care expenditures. Through self-funding, the employer is in control of the benefit dollars, the benefit design and the reserves. The result is savings in benefit payout.
The rationale of employers in implementing self-funding makes sense. That is to lower the ongoing fixed costs associated with the benefit program and pay only for claims experienced by their employees. Since over 80% of employees and dependents experience low dollars in claims, the savings for these employees are great.
For those employees and dependents with catastrophic claims, the other 20%, employers purchase stop loss insurance to minimize risk. Stop loss insurance for self-funded benefit programs is inexpensive compared to premium rates for fully insured benefit programs and protects the employer from high dollar individual and group claims, therefore eliminating the risk of catastrophic claims.
A self-funded plan can provide the same benefits to your employees that your current fully insured plan provides, or it can provide different benefits, depending on what your organization wants to provide.
Healthcare costs are planned for, just like all other employer operating costs, and are paid to the healthcare provider from employer dollars, rather than through an insurance company.
The rationale for in implementing self-funding is to lower the ongoing fixed costs associated with the benefit program and pay only for claims experienced by their employees. Since over 80% of employees and dependents experience low dollars in claims, the savings for these employees are great.
For those employees and dependents with catastrophic claims, the other 20%, employers purchase stop loss insurance to minimize their risk. Stop loss insurance for self-funded benefit programs is inexpensive compared to premium rates for fully insured benefit programs and protects the employer from high dollar individual and group claims, therefore eliminating the risk of catastrophic claims.
This concept requires that employers who decide to self-fund their healthcare benefits establish a fund, which is custodian for all the self-funding dollars, including the catastrophic insurance dollars and the administrative costs. If employee dollars are not used to pay claims, they stay with the employer and can be used to offset next year's cost or pay other benefits consistent with the plan. The dollars passed through the trust can be invested by the Employer and the interest earned should be credited back to the trust to help offset future plan costs.
• Control of plan design
• Administration tailored to the employer's needs
• Cash flow benefits (you hold your own reserves)
• Return on investment for reserves
• Cost and utilization controls (access to many discount programs)
• Effective claim processing
• Lower cost of operation (administrative fees are lower by nature)
• Elimination of most premium tax
• Carrier profit margin & risk charge eliminated
• Mandatory benefits avoided (state mandates can be avoided as self-funded programs are governed by ERISA
• Risk management effectiveness through stop loss insurance (the employer may choose the amount of risk to retain
The first step to becoming self-funded is to retain the services of a qualified and experienced Third Party Administrator (TPA). Third party administrators offer a variety of services including access to health care networks, administration, eligibility services, claims processing expertise, benefit plan design, legal and other services that employers typically lack the staff or expertise to provide on their own.
Next, the TPA and employer can develop a benefit plan that is designed to meet the health care needs of employees and at the same time is cost-effective for the employer. TPAs can also provide consultation to ensure that benefit plans are in compliance with current regulations such as ERISA and HIPAA.
Finally, the employer should obtain stop-loss coverage through a reinsurance carrier. Employers can purchase specific stop-loss coverage, which provides protection against catastrophic claims submitted by an individual, as well as aggregate stop-loss insurance, which limits the annual dollar amount for claims submitted against the employer's self-funded plan. Annual deductibles are established for both specific and aggregate stop-loss. Once these deductibles are met, the reinsurance carrier refunds monies to the employer's plan for any future claims submitted within the plan year.
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