Let’s talk self funding of health insurance. I find that to be a very commonly searched term in those finding their way to this blog.
And self-funding of health insurance is something more employers are considering today, given the rise in the costs of group health insurance.
Why Consider Self Funding Your Group Health Insurance Plan?
Self funding might be the only way that a smaller employer can really actually achieve some level of control over health costs. Otherwise, the only way to “reduce costs” is to go for larger deductibles and copays, i.e. to reduce benefits.
And reducing benefits isn’t controlling health costs… it’s simply passing them on to employees. But with self funding the employer can institute wellness programs — and then can participate in the reduced costs those wellness programs generate.
In addition, if an employer believes his group is healthier than the “average” group, he can lower his costs compared to fully insured plans. Why? Because in fully insured plans all groups pay the same (age-and-location-adjusted) rates, whether they’re sick or healthy. In self funding you only pay for your own claims (except, of course, for the “stop loss” premiums, but more about that later).
General Overview of Self Funding Structure
There are three components to self-funding: claims, administration and stop loss.
Administration: This is the easiest part of self funding to understand. It’s the cost of writing the policy (commissions, advertising, etc) and of actually running the plan (processing claims, paying claims, administering or paying to participate in PPO networks, etc.) Even in small groups this cost is seldom more than 20% of the cost of a plan.
Stop Loss Insurance: This is the part of the plan that protects the employer against surprises. There are two kinds of insurance:
- Specific Stop Loss Insurance. This is the most costly part of a plan. It protects the employer against a “shock claim,” that is, a serious claims of exceedingly large proportions. “Large proportions” depends on the size of the group. A group of 30 employees can’t handle a claim much over, say, $20,000 or so. Otherwise it will eat up the entire anticipated and budgeted losses for the year. On the other hand a group of 100 employees could easily handle $50,000 – $75,000.
- Aggregate Stop Loss Insurance: This is insurance that protects the employer against over-utilization. That is, it protects against all the small claims (those less than the point at which the specific stop loss policy begins paying) from exceeding some amount over the one-year contract period. At some size a group becomes large enough so that Aggregate Stop Loss is a waste of money, as the “law of large numbers” suggests that there’s little chance of claims reaching the probable maximum.
The cost of stop loss (as a percentage of total health costs) diminishes as the group gets larger, simply because the employer can share more risk and pay for less insurance. Even in a small group, stop loss costs typically don’t exceed about 40%.
Claims: That leaves the actual claims themselves. If you stop to think for a moment, we now know that we can pretty accurately predict what the maximum cost of a self funded health plan will be. It’s going to add up to:
- Administrative costs
- Plus stop loss insurance premiums
- Plus maximum claims.
There really isn’t any way for costs to exceed that level (not completely true… but we’ll tackle that in the next of these articles.) In fact, in about 80% or more of the cases, actual claims will be less than the projected maximum.
That’s the simple overview, but there’s lots more to self funding. We’ll take up the details over the next few days as we continue with our series.
