Navigating the Funding Options for Your Healthcare Plan

Evaluating Self-Funding Strategies for Your Plan

The right funding strategy depends largely on your organization’s risk tolerance. If your organization tends to be conservative, preferring lower risks, you will likely prefer remaining fully insured. If you are in the middle ground, the best choice may be a level-funded or self-funded plan with a single vendor. But if you are comfortable assuming a higher level of risk, a self-funded program with multiple vendors may be the most logical choice.

Self-Funding Fundamentals

With self-funding, the organization assumes total fiduciary responsibility for the benefits plan, including all of the claims cost (or most, with stop loss coverage). Self-funded plans are exempt from state mandates and premium taxes and allow complete flexibility in determining coverage and network options. Best of all, employers can retain positive cash flow when claims are lower than expected.

How Self-Funding Differs from Being Fully Insured

The easiest way to understand the key differences between a fully insured plan and self-funding is to compare them to household bills. Fully insured plans are like your cable bill. You will pay the same predictable amount every month, no matter how many hours you watch. Self-funding is more like your electric bill, primarily based on how much electricity you use, putting you in control. In a fully insured plan, the carrier is wholly responsible for the risk and gets to make all the decisions. In self-funding, you are the decision-maker.

What Self-Funding Is Not

The biggest misconception about self-funding is that it is only about saving money. While it will often do that, it doesn’t always. Nor is it a simple one-size-fits-all solution. There are many variables and options—the self-funding plans for two similar employers may look very different.

Advantages of Self-Funding

There are many advantages associated with self-funding, but the biggest include the ability to keep funds after lower-than-expected claims and the detailed claim reporting that informs ongoing decision-making. Companies can bundle services with a single vendor or choose best-in-class sources for each role.

Disadvantages of Self-Funding

The biggest disadvantage of self-funding is that employers are liable for the higher costs of a bad claims year, although that can be mitigated with stop loss coverage. Funding a plan can put additional pressure on the budget and cash flow, especially during a bad claims year, and the organization must also assume state and federal compliance responsibilities.

Is Self-Funding Right for Your Plan?

Being a good candidate for self-funding begins with financial stability so the company can commit adequate funding and contend with the unpredictability of claims. It also helps to have a stable or growing workforce with low turnover because that improves the predictive value of claims data. Self-funding requires a long-term commitment and an appetite to take on more risk. Most of all, it demands leaders with the expertise to manage the financials and all the administrative and compliance aspects.

Reducing Your Risk with Stop Loss Coverage

As an employer who chooses self-funding, you take on one hundred percent of the actual cost of claims. For that reason, you should always evaluate purchasing stop loss coverage. This coverage protects you against excessive losses. “Specific” stop loss involves individual members of your plan, protecting you when a member is treated for a high-cost diagnosis such as some forms of cancer. The stop loss policy pays for any additional dollars above an agreed-upon level. “Aggregate” stop loss protects you during a year when claims are unusually excessive.

Estimating Your Claim Cost

Stop loss coverage is priced mainly on how the underwriter projects your future claims based on where they are today. They add a risk margin known as a “corridor” (typically 20% to 25%). Suppose the underwriter projects your aggregate claims at $800,000 and adds a 25% corridor for a total of $1 million. If your claims total $1.2 million, the stop loss carrier will reimburse you for the additional $200,000.

Developing a Strategy for Transitioning to Self-Funding

Before moving forward with self-funding, consider the challenges and barriers you might face. One of the most common is access to claims data. Your current carrier may be unwilling to share the data you will need. It is important to understand that claims detail is your data, and it should be provided by your carrier or administrator. If necessary, this should be negotiated as part of the review of your administrative services agreement.

One strategy some companies use to get access to claims data is to begin with a short-term move to something like level-funding, which will generate the data needed to pursue self-funding. Another is to ask your current carrier to provide a self-funded proposal option at renewal.

The More Time, the Better

Fully insured organizations are accustomed to having 45 to 60 days to review their carrier’s renewal. Self-funding requires far more time for decision-making. We recommend starting the process at least six months before your renewal date to accommodate the learning curve and give you time to consider the vendors you will need.

Ultimately, an Individual Choice

The right funding option for your organization is an individual choice. There is no right or wrong approach for everyone: it’s about understanding and considering all the factors and how they will potentially impact your plan. Working with a knowledgeable partner with extensive experience in self-funding will make the entire process easier and enhance the likelihood you will end up with the perfect plan for your employees and bottom line.

More Depth and Insight

The webinar explored the topics discussed in this post in much greater depth, with plenty of practical applications and tips. View the recording here.

For help exploring funding options for your organization, contact a Hylant advisor.

Related Reading: Mastering Pharmacy Costs: The Power of Strategic Contracts

The above information does not constitute advice. Always contact your employee benefits broker or trusted advisor for insurance-related questions.