Advantages of Partially Self-Funded Health Plans
JUNE 1, 2021
Many employers with fully insured benefit plans share common misconceptions about self-funding. These include: “It’s more work,” “It is too risky,” and “We are concerned about the unknown outcomes.” Or, they don’t fully understand the self-funded approach, and they believe it’s too complicated and would be difficult to manage. At USI Insurance Services, we believe that the advantages of a partially self-funded health plan outweigh the potential drawbacks, and that nearly every employer could better manage its health plan costs on a partially self-funded plan instead of a fully insured plan.
What’s the Difference Between Fully Insured and Self-Funded Plans?
A fully insured health plan is one where the employer pays a fixed monthly premium to the health insurance carrier in return for the carrier paying all plan member claims. If the premium collected is greater than the claims, the carrier retains the excess as profit.
With a partially self-funded health plan, the employer contracts a health insurance carrier or third-party administrator (TPA) to administer all aspects of the health plan, including claims adjudication, but the employer funds the claims payments. Employers purchase stop loss insurance that would pay if any catastrophic claims, such as cancer or premature birth, were to occur. With this arrangement, the employer is paying the health insurance carrier or the TPA considerably less than a fully insured arrangement.
Compared to a fully insured plan, where the employer pays a monthly premium to the carrier that covers the cost of administering the plan and paying the claims, with a self-insured plan, the employer pays less to the carrier or TPA for plan administration, and only pays for the claims processed that month. While claims vary each month, the employer reaps the rewards when few claims need to be paid, and the funds can be set aside in a reserve for future claims.
Statistically speaking, a self-funded plan with at least 100 employees is most likely to save money as compared toa fully insured plan, as demonstrated in this short video. The chart in the video shows that as group size increases, so does the probability that self-funded plans cost less than fully insured plans.
How Do Partially Self-Funded Plans Drive Savings?
The statistical likelihood that partially self-funded plans cost less can be attributed to the following:
- Elimination of carrier profit and premium taxes. Health insurance carriers carefully underwrite their contracts to ensure they will not pay more for a plan than what they’ve collected in premium. In the U.S., individual states impose a tax on insurance premiums that can range anywhere from 0% to 4% of the premium. Removing carrier profit and premium taxes can generate substantial savings in health plan costs.
- Flexibility. Self-funded plans in the U.S. are only subject to ERISA laws and not state health plan regulations and benefits mandates. This affords employers more flexibility to design health plans that are both cost-effective and meet employees’ needs.
- Transparency. Self-funded plans provide greater transparency as employers are able to view claims utilization data, which allows them to make more informed decisions to help reduce costs.
- Competitive bidding. With fully insured plans, the employer’s premium is paying for the plan components, such as claims processing, network access, disease management and pharmacy, all bundled together. Self-funded plans can be unbundled and each component purchased separately, allowing the employer to shop around for the component that best meets its needs and price point.
How Much Can You Save?
For most employers, the combination of the above factors generates total plan savings in the range of 5% to 10% of total plan costs. For an employer with 500 employees, this equates to savings between $250,000 and $500,000 annually. Self-funding also often serves as the gateway to implement additional innovative solutions and strategies that reduce health plan costs, such as reference-based pricing.
How USI Can Help
Our dedicated employee benefits Customer Analytics practice has developed a proprietary Self-Insurance Exploration Analysis tool to help employers determine the savings a partially self-funded plan could deliver. This tool utilizes an employer’s historical data to provide unique insights on the risks and opportunities associated with a self-funded plan, and to help the employer assess its appetite for self-funding.
In addition to the Self-Insurance Exploration Analysis tool, we offer a variety of proprietary solutions to help companies better manage the costs of self-funding. We have negotiated employer-favorable terms and conditions with the leading stop loss carriers to form the USI Stop Loss Consortium, which offers employers best-in-class reinsurance contracts. To help our clients identify top-quality service providers for their benefit plans, USI has created the USI Preferred TPA panel. The TPAs that are a part of the panel have been formally vetted through a comprehensive RFP process to ensure they have the capabilities to deliver quality service to USI clients.
Please contact your local USI benefits consultant if you are interested in the Self-Insurance Exploration Analysis tool to learn how your plan might perform and the potential savings you could see if it were partially self-funded.