In the United States, over 155 million people received medical and health-related benefits through some form of employer-sponsored program in 2021, according to the Kaiser Family Foundation. As healthcare costs continue to increase year over year, it should not come as a surprise to learn that after compensation-related expenses, healthcare costs are usually the second highest expense for most employers.
Employers are beginning to ask important questions about the future of their health care offerings and turning over every stone in an effort to control these ever-increasing costs. For employers that are currently leveraging fully insured plans, a prime opportunity to lower the total cost of healthcare exists through self-funding. By transitioning to a self-funded program, employers can achieve savings of anywhere from 5% to 15% depending on their program design and cost structure.
Self-insurance has become the most prevalent way to fund for healthcare benefits. Of those employers offering employer-sponsored programs, 67% choose to do so through a self-funded program.
What is Self-Insurance?
Self-insurance, also known as self-funding, is a strategy used by employers to gain control over healthcare costs. In addition to control, the significant savings achieved through self-insuring is exactly why so many are considering a transition, as a viable alternative to manage and lower costs.
Self-insurance is the process of unbundling a fully insured plan, where employers use a third-party administrator to operate the plan from a benefits and claims processing perspective. This ensures that employees are not impacted by the change. The most significant difference pertains to how the program is funded; instead of paying a fixed premium amount, employers take a portion of the financial risk associated with the claims of the program, in exchange for lower overall costs.
The incentive for incurring this additional risk directly relates to the hefty charge carriers typically add on to their fully insured premiums. By taking on this extra risk, employers strip away these insurance carrier profits and are able to reduce their healthcare spending. To protect against the catastrophic losses that may occur due to higher-than-expected claims frequency or severity, employers typically take advantage of medical stop-loss coverage.
Groups looking to move to self-insurance should focus on understanding the financial and qualitative impact of this move. For this reason, we usually recommend groups that are larger (over 100 enrolled lives) to contemplate this strategy. The reason for this threshold is that most states regulations allow companies with over 100 enrolled employees (50 enrolled employees in some states) can request the insurance carriers for their historic claims information. This can then be reviewed by actuaries to help understand and outline the financial implications of potentially taking on some of the risk associated with moving to self-insurance.
Managing Risk – Stop Loss Insurance
The largest concern when considering a self-funded program relates to the risk of the program being impacted by unexpectedly high claims – be it due to the volume of claims or due to the exposure to a handful of large loss claims. One very sick individual or a series of unanticipated smaller claims could lead to a higher-than-expected claims level in a self-insured plan. Stop-loss insurance minimizes or eliminates this risk as well as dramatic fluctuations in claim costs over time, creating a level of predictability.
Aggregate Stop-Loss – Provides employer protection for the risk of catastrophic loss by providing insurance coverage for total group claims over a certain dollar amount. Stop-loss carriers issue policies that pay when the aggregate claims amount exceed a pre-determined percentage of expected claims levels. Aggregate stop loss is usually expressed as percentage of expected claims like 125%.
Specific Stop-Loss – Provides employer protection for individual catastrophic claims. Similar to aggregate stop-loss, financial protection is provided when the claim exceeds the pre-determined deductible or attachment point. Specific stop loss is usually expressed as a deductible amount like $25,000 per individual. For both specific and aggregate stop-loss, all claims exceeding the attachment point are covered by the stop-loss carrier and not the responsibility of the employer.
Additional benefits to self-funding include design flexibility, cost transparency, and increased savings. Further, increased insight into the actual cost of care, administrative costs, and any loaded fees or additional expenses to the plan allow for more informed decision making.
Full Transparency & Increased Access to Data
Many fully insured employers don’t understand the true cost of their program or areas of claims concentration, or using a broker or advisor, as commissions are often loaded into premium rates. Additionally, obtaining claim information in a fully insured environment is challenging. Increased transparency and data with self-funding allows employers to analyze cost drivers and implement targeted programs to lower utilization costs, while increasing employee health and satisfaction. In a self-insured plan this information is easily available on a timely basis, thereby allowing employers to better understand their programs and make changes to cater to their unique demographic of employees before their next renewal.
- Program & Design Flexibility
Every state has a unique list of mandated coverages that can add significant costs for both employers and their employees. Because self-insured plans are governed by ERISA and generally pre-empt state law, employers avoid these additional costs by allowing them to design plans that meet both employer and employee needs, increasing satisfaction for all stakeholders.
Better-than-expected claims in one year can offset next year’s expenses or reduce program contribution levels. In addition, employers may choose to purchase medical stop-loss insurance or a level funding arrangement to provide additional security and create consistency from a cash flow perspective.
Typically, premiums paid in fully insured programs include loaded fees and industry loss trends. In a self-funded program, employers not only minimize or avoid paying these additional charges, but their costs are directly correlated to their specific experience, and not that of their peers. Tools such as consumer-directed health care, price transparency tools, specialty networks, value-based plan designs, and wellness programs all can be built seamlessly into a self-funded plan and help drive down utilization costs and the total cost of healthcare.
Self-insurance remains a powerful tool in an HR team’s arsenal to control and potentially reduce the burgeoning healthcare costs, as well as provide benefits that are targeted to their population. Employers who make the change can reap immediate advantages and avoid, or at least slow down, inevitable cost increases. Our client, edHEALTH, is a prime example of self-insurance done right, where their members were able to gain savings, offer enhanced coverage, and take a more targeted approach to employee benefits. Our Consulting Team is made up of highly trained risk funding professionals with years of experience. We help employers navigate the self-funding waters and to develop the best funding strategy to meet their individual needs.
 (2021). 2021 Employer Health Benefits Survey. kff.org. https://www.kff.org/report-section/ehbs-2021-section-1-cost-of-health-insurance/.