If your company is growing, you may have heard about – or considered – transitioning to a self-insured funding strategy for your medical benefits as a tactic to control cost. But what does it mean to be self-insured, and who should consider making the change? Here’s our guide to different funding strategies, and when it may be an appropriate time to consider adopting a self-insured funding arrangement.
What are my options?
Generally, there are three options as to how you can fund your medical benefits. Depending on what your insurance carrier offers, you can choose to be fully insured or self-insured, or you can opt for a hybrid strategy that offers the best of both approaches.
- Being fully insured means you’ll pay a fixed premium rate to your health insurance carrier based on the risk characteristics – like age, gender, and claims experience (i.e., historical health care usage) – of your employees. In this arrangement, the insurer takes on the risk that the premium you’re paying is sufficient to cover their fixed costs plus any claims your employees might incur. As an employer, this means you know what you’ll pay for the year, although your premiums will likely increase from year to year.
- With self-insurance, you’re essentially paying the insurance carrier to be the administrator, while you take on the risk to fund the cost of claims. A self-insured arrangement reduces cost in two distinct ways. First, it is exempt from state premium and ACA taxes and insurance carrier risk charges. Second, oftentimes actual claim costs are lower than what was forecast in the fully insured rate. However, to protect yourself should claims be higher than expected, you can purchase large loss protection, which is often referred to as “stop-loss” insurance. Individual stop-loss limits the liability on any one individual to a pre-established amount such as $100,000, while aggregate stop-loss limits the total group liability to a pre-established amount such as 125% of expected claims.
- In a hybrid arrangement, you’re venturing into being self-insured without taking all the risks. You’ll have more budget certainty while still avoiding the taxes and risk charges. However, you won’t save as much money if claims are less than projected as you would if you were traditionally self-insured. Finally, in the hybrid arrangement, stop-loss insurance is an integral part of the financial arrangement. Check out our blog post on hybrid-funding to learn more and find out if this strategy is right for your company.
Who should consider becoming self-insured?
A self-insured funding arrangement can be a great choice for an employer wanting to save money on taxes and carrier risk charges – and potentially on claims. Initially, the thought of not having a fixed premium, and being liable for unknown employee medical claims, may seem a little scary. However, if done right, this kind of strategy can help you reap financial rewards.
If you are financially able as an organization to take on the risks year after year, meaning you have enough cash flow to pay for claims in a particularly bad year (and remember that aggregate stop loss insurance can minimize your up-side exposure to 110% to 125% of expected claim costs), you may be able to save a significant amount of money on average over many years. We generally recommend that when group size is around 100 or above, employers might want to start looking into whether self-insurance could benefit their company’s finances.
Want to speak to a benefits expert to see which funding strategy is right for you? Contact us today for a free consultation.