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Self-funded health plans

Advantages and disadvantages of employee health plans that do not primarily rely on insurance purchased by the business

by Tony Novak, updated February 2,2014

Rising health insurance costs and the anticipation that health care reform are predicted to accelerate premium cost inflation in coming years has triggered more small business employers to consider self-funded health care plans as a more attractive option than fully insured health plans. The ability to cut the insurance company out of the equation can have dramatic cost-saving effects for a business with healthy employees.

The data supporting this strategy are compelling: total medical claims of healthy plan member average substantially less than $1000 per year while the average annual health insurance premium is more than $7,000. In contrast, less than 15% of unhealthy individuals, most of whom are not full time workers of small businesses, account for the majority of the nation's total health costs. This leads many small business owners to conclude that there may bemore efficient ways to help cover employee health espenses.

This short article summarizes the advantages and disadvantages of pursuing a self-funded strategy.

Advantages

  1. Ability to define benefits and limit costs. A self-funded plan can be designed to provide medical benefits that the employer can afford rather than benefits required by insurance laws.
  2. Ability to separate the primary coverage for castastropic medical epenses (best covered by qualified insurance) from routine and common medical care (best covered with supplemental coverage or without insurance).
  3. Exempt from insurance exchange costs including marketing costs, internet enrollment, provider network and quality accreditation rules. This will save two to four percent per year beginning in 2014.
  4. Self funded plans are exempt from most state mandates. This can save up to 12% depending on the state and benefits selected.
  5. Control and flexibility of plan design especially those items that result in increased utilization. This feature can have the most dramatic effect on cost.
  6. Control of reserve funds. The employer controls all funds rather than transfer reserve funds to an insurer. If an employer’s claims experience is better than expected, the employer and not the insurer will benefit financially.
  7. Eliminate community claims experience payments. Even when an employer's insurance plan has no claims, insurance premium rates increase due to the claims by other members of other companies in the health plan. This does not occur in a self-funded plan.
  8. No premium tax. This saves two to four percent of overall costs.

Disadvantages

  1. If employees purchase primary coverage on an individual insurance exchange, any employer contribution to the cost of that coverage is taxable income to the employee.
  2. A single catastrophic claim or chronic care claims could cause a cancellation of the self-funded health plan. In this case, the business may need to switch back to a fully insured plan.
  3. Few professional benefit firms provide support services tailored to small businesses.

Freedom Benefits designs and helps with administration of self-funded and partially self-funded plans for small businesses. See www.freedombenefits.net/business for more information.


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This web site is independently owned and managed by Tony Novak operating under the trademarks "Freedom Benefits", "OnlineAdviser" and "OnlineNavigator". Opinions expressed are the sole responsibility of the author and do not represent the opinion of any other person, company or entity mentioned. Tony Novak is not an agent, broker, producer or navigator for any federal or state health insurance exchange but may provide uncompensated advice, reviews and referrals to these official resources. Novak is compensated as an accountant, adviser, affiliate consultant, marketer, reviewer, endorser, producer, lead generator or referrer to some of the other commercial companies listed on this site. Information is from sources believed to be reliable but cannot be guaranteed.