Some businesses provide health or disability benefits to their employees through a self-funded plan, also referred to as Administrative Services Only (ASO). In this type of plan, instead of paying fixed monthly premiums for insurance coverage to an insurance company, the employer uses company funds to pay each claim as it is incurred. In essence, the employer stands in the shoes of the insurer.
This type of arrangement is not for every business, and works best for those that have more than 50 employees but more prevalent with groups over 100. Companies with fewer employees may decide it could work for them, but they must have sufficient cash flow to make a self-funded plan viable.
In order to assist employers to decide whether or not it would be in their interest to have a self-funded plan, they need to evaluate their existing plan and review past claims experience if available, specifically large claimant information. They also need to weigh the advantages and disadvantages to such a plan before making the final decision to transition from a fully insured plan to a self-funded one.
Advantages To Employers
- Improvement of cash flow: Self-funded plans only pay submitted claims and can reserve the funds that normally would have been used to pay for a fully insured plan to accumulate interest and increase cash flow.
- Ability to avoid state mandates: Self-funded plans are regulated by ERISA, which is federal law, and not controlled by the individual state’s insurance laws.
- Flexibility in benefit design: Employers can choose what benefits to provide as opposed to insurance companies which must provide coverage consistent with the plan provisions they have filed with the state.
- Flexibility with plan components: Employers can select vendors, such as plan administrators, health care providers and others with whom to contract to best serve the specific needs of their employees.
- State tax savings: Self-funded plans save about two to three percent on every dollar since they only pay taxes on the Stop-Loss coverage they purchase, not on the total cost of a fully funded plan.
- Savings on insurance carrier risk charges: Claims processing by employers is less expensive than the cost of fully insured plans.
- Rebates for prescription drugs: The plan may be able to receive a portion of pharmaceutical rebates
- Claims data access: Employers of self-funded plans have access to claims data they do not have access to under fully-insured plans due to HIPAA privacy requirements. This helps them analyze and predict future plan costs.
- Cost of plan administration: This may be slightly less expensive than a fully-funded plan.
Disadvantages To Employers
- Potential for higher costs: There is always the chance that the actual costs will be greater than the prediction and that could mean the self-funded plan was actually more expensive than a fully-funded one.
- Need to purchase stop-loss insurance: In order to limit employer liability for catastrophic events, employers purchase stop-loss insurance.
- Budgeting problems: The amount needed to pay claims varies from week to week, making it difficult to budget.
- Employer becomes a fiduciary as plan administrator.
- Privacy requirements of HIPAA: Employers must develop procedures for protecting the privacy of the health records of their employees.
- Cost of drafting plan documents: Employers are responsible for all plan documents including a plan summary and description.
- Requirement to have an appeals process: This must be in place so employees have recourse if their claims are denied.
- Must meet IRS non-discrimination requirements: If these requirements are not met, there may be a substantial penalty imposed.
The major issue employers who are considering self-funded programs must consider is that in the self-funded plan, the employer is the one at risk for paying the claims. For companies with fewer than 50 employees, self-funded plans may not be the best option, although it is possible to reduce the risk somewhat by purchasing excess-risk coverage.
For small business employers, it is recommended they make this decision after consulting with SIG and providing the company with as much information as possible concerning the type of work force and past claims. This will make it easier for SIG to help the business owner assess whether or not to choose a fully insured or self-funded benefit plan.