Small Businesses and Self-Funded Medical Insurance – Myth vs. Reality
Many small to medium-sized companies avoid self-funded medical insurance, believing it is too risky and only appropriate for larger businesses. However separating the myth from reality shows that self-funding can be a wise choice for companies with as few as 25 employees.
How Self-funding Works
With a self-funded plan, the employer pays all medical claims directly, and uses a third party administrator to manage the claims, issue ID cards, assist employees with the filing of claims, and answer employees’ questions.
Separating Myth from Reality
Myth: One serious health claim can wipe out a company.
Reality: Companies can protect themselves from the financial risk of an expensive medical claim by purchasing stop-loss insurance. This coverage allows an employer to establish an annual liability limit per employee. For example, if an employer has individual stop-loss insurance of $20,000, and an individual has $50,000 in claims, the stop-loss insurance will reimburse the employer’s health plan $30,000, and any additional claims for that individual for the remainder of the coverage period will be covered by the stop-loss insurance. Individual and aggregate stop-loss insurance is available.
Myth: Self-funding is too much to manage.
Reality: A benefits administrator will process all health care claims, and will manage the day-to-day details of the self-funded plan. In some cases, an employer will contract a benefits administrator, then secure a separate provider for the stop-loss insurance. The integrated solution provides the best coverage, because it eliminates gaps that can occur due to conflicting interpretations of contracts, eligibility rules, and disclosure requirements. An integrated solution makes transactions faster, more efficient, more secure, and protects companies from surprise fees that can arise.
Benefits of Self-Funding
The data benefit. Unlike the fully funded option, self-funding allows companies to access data reports which help them know exactly where and how their health care dollars are being spent and make informed decisions when considering benefits changes. This data can include things like number and length of hospitalizations, frequency of emergency room visits, outpatient visits, and pharmacy information.
No surprises at renewal. With a fully funded plan, an employer typically receives a renewal 60 days prior to the effective date. Up to this point, an employer knows nothing about current and future costs, or claims, which can affect the cost of the renewal premiums. Smaller companies typically don’t receive any data to explain or justify renewal increases. With a self-funded option, the employer has access to all data, so there are no surprises at renewal.
Greater control. Armed with good data, self-funding allows companies to adopt strategies that can reduce claims expense. This may include offering wellness programs, preventive care, and helping employees make smart choices about health care. Fewer claims result in less health care expense, and lower premiums for the company. The data benefit also helps companies track the effectiveness of wellness programs and preventive care. Employers can also negotiate rates with doctors, hospitals, and other health care providers, resulting in discounted health care options. Self- funding gives employers the opportunity for immediate savings and sustainable cost control.
Lower taxes. Premiums for self-funded plans are taxed at 25 percent of the premium, versus 100 percent with a fully funded plan.
If a company is exploring the self-funding option, there are some things to consider.
Know your company. Understand the underlying claims cost, and the employee population – the age and general health state of the population. Is the business a high risk or low risk business?
Know how it will affect rates. If a company has lower than expected claims, they will see immediate savings with a self-funded plan. But, if claims are higher than expected, costs can increase, even up to the stop loss limit.
Be aware of terminal liability. If a company ends its agreement with a benefits administrator, any costs incurred during the health plan year but filed after the date of termination with the administrator will still have to be paid by employer.
Be aware of claims litigation liability. In a self-funded, the benefits administrator handles the day-to-day decisions, but may not make decisions about claims appeals, depending on the agreement with the administrator. A key difference in self-funded and fully funded plans is that with a self-funded plan, the sponsoring employer is solely responsible for defending any lawsuits based on claim payments decisions. If a claim denial gets overturned in court, the employer could face paying the claim and associated legal fees. Experts say this occurrence is rare, but employers should still be informed of the potential liability.
Smaller companies that have been reluctant to consider self-funded medical plans should be aware of the benefits and the safety measures in place to minimize the risk. Eliminating the myths about self-funded programs may demonstrate that it is a good cost-saving option for many businesses.