Self-insured Benefits

As health care costs continue to climb, employers are actively looking for ways to mitigate these costs. Some turn to cost-sharing methods, like offering high deductible health plans. Other employers are making the switch to self-insuring as a way to reduce costs and improve service. Self-insuring health benefits can provide many advantages for employers. However, it is important for employers to do their due diligence before deciding if self-insurance may be the right choice.

We can utilize our expertise to help evaluate if a self-insured plan is right for you. If it is a good fit our team of experts will help design, implement, and monitor your plan to ensure success.

What Is a Self-insured Health Plan?

A self-insured health plan is one in which the employer assumes the financial risk associated with providing health care benefits to its employees. Rather than paying fixed premiums to an insurance company—which, in turn, assumes the financial risk of paying claims—the employer pays for medical claims out-of-pocket as they are incurred.

Self-insured Plans and Stop-loss Insurance

One component that many self-insured plans use is an extra feature called stop-loss insurance. The purpose of stop-loss insurance is to provide financial protection to a self-insured plan sponsor by capping and further defining the plan’s financial exposure. A stop-loss contract operates differently from general insurance because it is actually insuring the employer and not the individual employee. When a plan is self-insured, the stop-loss contract insures the employer against catastrophic losses under the plan. The medical plan established by the employer accepts the responsibility for paying providers’ claims for individuals but limits its risk with stop-loss coverage.

Stop-loss insurance provides protections in two forms:

  1. Specific stop-loss—Also referred to as individual stop-loss, it protects a plan against individual catastrophic claim occurrences. This type of stop-loss coverage shifts responsibility for a claim to the insurer once it exceeds a certain dollar amount for a specific claim.
  1. Aggregate stop-loss—Limits a self-insured plan’s financial exposure for the entire plan year (or policy year) and protects against abnormal claim frequency across the entire group of individuals. This type of stop-loss coverage protects the employer against high total-health-plan claims.

Level Funding

If you desire the freedom of a self-funded insurance plan but need a little more certainty for your budgeting concerns, level funding might be an option for you. Level funding is an option that can accompany a self-funded plan, aiding employers in their health coverage budgeting efforts.

With level funding, employers pay a set amount each month to a carrier. This amount typically includes the cost of administrative and other fees and the maximum amount of expected claims based on underwriting projections, as well as embedded stop-loss insurance. The carrier facilitating the level funding will pay your employees’ claims throughout the year. At the end of the year, if your payments exceeded claims, you will receive a refund from the excess you paid in monthly claim allotments. If the claims exceeded what you paid into the program, in most cases your stop-loss insurance will cover the overage amount.

Advantages of Self-insurance

  • Reduce insurance overhead costs: Carriers assess a risk charge for insured policies (approximately 2 percent annually), but self-insurance removes this charge.
  • Flexibility in plan designs, administration, and offered services: By self-funding, employers are able to design their own customized health benefit packages. They are able to select their Third Party Administrator (TPA) and provider network. Further, they can easily add other services like Employee Assistance Programs (EAPs) and wellness incentives.
  • Improved cash flow: Claims are paid as they become due. There is also a cash flow advantage in the year of adoption when "run-out" claims are being covered by the prior insurance policy. Employers pay for claims rather than premiums and earn interest income on any unclaimed reserves.

Disadvantages of Self-Insurance

  • Greater risk: The main risks of self-insuring involve situations where claims are higher than anticipated. While stop-loss coverage will protect employers from paying excessive claims in a given year, the cost of that coverage will likely increase, and it may be more difficult to get rates from other stop-loss providers.
  • Higher administrative costs: For organizations that choose to run their self-insured plans internally, the administrative costs involved can be significant. However, using TPAs to operate the plans will still likely involve lower administrative costs than those associated with fully insured plans.

For more information about self-insured health plans, and whether they are right for your company, contact us today.

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