To successfully run a business, an employer needs to have control over all aspects of their operations. Historically, a major area where that control has been transferred to a third party is the employer’s healthcare program. By paying a fully insured premium to an insurance company, all control of effectiveness and efficiency of how those funds are used is handed over to an insurance company, whose objectives and priorities may be in conflict with those of the employer.
By self-funding the healthcare benefits offered to employees, the employer retains control over a major expense. The self-funding strategy allows the employer to focus on:
- Effective cash flow savings opportunities
- Control of actual claims data for analytics and planning
- The specific benefit needs of their employees
- Administration flexibility
When an employer self-funds, they take on the risks of paying the medical claims of their employees rather than a premium loaded with margins, reserves and profits. In essence, the employer is a nonprofit risk-taker of the costs of the plan. This enables the employer to financially benefit from significant cash flow advantages.
- The timing of cash distributions are in line with the timing of claims being incurred. There are no prefunding requirements.
- All funds held in reserve to fund future claims are held by the employer rather than the insurance company.
- Savings generated when claims are less than expected are retained by the employer, not in the form of profits to the insurance company.
- Through focused efforts, short- and long-term costs can be effectively kept under control.
Ownership of Data
In a self-funded plan, all data accumulated on the activity of all aspects of the plan belong to the employer. The transparent data is a valuable asset for the employer to know how their funds are being spent, if they are being used effectively, and what planning actions for the future are indicated.
- The data is provided timely, frequently and accessible directly by the employer’s staff or business associates.
- The data is integrated among all the strategic partners so the employer has a unified view of their plan performance.
- The data is actionable for future decisions on plan design, benefit offering and funding. This allows those decisions to be based on actual plan performance.
Flexible Plan Design
Self-funded plans comply with the requirements of ERISA, within the constraints of the Affordable Care Act. This allows the employer to:
- Customize the plan design to meet the needs of their employees, not conform with the plan constraints of the insurance company’s contract.
- Utilize actual data to determine changes in the plan indicated by past utilization by the plan participants.
- Steer employees to quality, cost-effective providers in their communities.
- Design and encourage utilization of disease management and wellness to improve the health of their employees.
- Define effective, transparent prescription drug programs.
- Have consistent plan design across state lines, avoiding conflicting state mandates.
A self-funded employer arranges for strategic partners to administer and provide services typically provided by the insurance company. Important considerations are:
- The integration of all strategic partners so that data is consolidated, control is aligned and the focus is on the employer.
- Administration of the plan and assumption of the risk is segregated when both are not provided by the insurance company.
- Strategic partners have the ability to contract with providers and networks that best suit the needs of the employer and its employees.
- Overhead costs are usually significantly less than a fully insured plan
Self-funded plans provide significant advantages in costs savings, data utilization, plan design and administrative control that makes it an attractive option for employers to provide cost effective, quality benefits for their employees.