When funding health benefits for employees, two options are available: traditional health insurance and self-funding.
Two roads diverged in a wood, and I,
I took the one less traveled by,
And that has made all the difference.
Borrowing the last lines from one of our nation’s most beloved poems, I had thought self-funding was the road less traveled. This used to be the case, but things are changing. Between 1999 and 2014, the proportion of public and private sector workers covered by a self-funded health plan increased dramatically from 44% to 61%—Self-funding now accounts for the majority of workers with an employer-sponsored health benefit plan. It has become the road MORE traveled.
With the shifting health benefits landscape, many expect this trend to continue. An increasing number of benefit plan managers are choosing self-funding. While the growth has been particularly strong among health plan sponsors with 1,000 or more workers, some predict an upward trend among smaller plans as well. The stop-loss insurance industry is now more open to providing coverage to small businesses, including some companies that have as few as 25 employees.
What accounts for this change? The 2010 “bump” in coverage suggests the Affordable Care Act (ACA) has something to do with the increased interest in the self-funding of health benefits. However, there are other reasons that also appear to be motivating employers to make the transition from fully insured to self-funded health benefit plans.
Several possibilities are offered in the book Self-Funding Health Benefit Plans, recently published by the International Foundation:
- When setting premium rates for health plans, for-profit insurance carriers build in margins, broker commissions, marketing and, of course, profit—all unnecessary charges with a self-funded plan.
- Insurers must pay a premium tax to both the state and federal governments that is also reflected in what they charge for insurance coverage. Premium taxes are not assessed on self-funded plans.
- Self-funded plans are not locked into off-the-shelf benefit designs offered by insurers—They can customize benefits to reflect the special circumstances of plan participants.
- Self-funded plans are not subject to many of the ACA requirements such as the community ratings that apply to small businesses, the essential health benefits and the medical loss ratios.
- Plans that are self-funded with a healthy workforce can capture their favorable claims experience, an option not always available when funding benefits through a fully insured plan.
- Some self-funded plan sponsors are able to get a better investment return on the reserves for their incurred but not reported (IBNR) claims than they would get through an insurance company.
Of course, the self-funded path is not always smooth. There can be some bumps (disadvantages) that mean self-funding is not for everyone. I’ll let you read Self-Funding Health Benefit Plans to learn more about these. The new book is full of practical information on all aspects of self-funding, including:
- Self-funding costs and options
- Stop-loss coverage
- Plan design and cost management
- Claims processing
- Investment of plan reserves
- Compliance with ACA, ERISA and other federal regulations.
More than two dozen benefit experts offer basic information and practical advice on these and related topics. There is even a checklist for sponsors considering making the transition from a fully insured to self-funded plan.