Startups and Small Businesses

Complete guide to moving to self-funded health plans

Considering moving to a self-funded health plan? Our guide will answer your questions and help you switch with ease.

Why do you need a guide to move to self-funded health plans?

Employers cover health benefits for more than one-third of America’s population (157 million people, to be more precise). As much as 67% of these employees have coverage from self-funded plans. However, many companies still don’t understand how this insurance option works and seek the best guide to moving to self-funded health plans before making the switch.

If you are facing increasing premiums and healthcare expenses or if you are looking to offer coverage for your employees for the first time, you may be ready for a change in your healthcare plan. Learning basic concepts, cost-saving opportunities, and the overall advantages of self-funding can help you better strategize your company’s health plan transition. 

Exploring the differences between self-funded coverage and fully-funded insurance may provide you with information to narrow down your search. This comprehensive guide will give you more details about all of the above and more.

What is a self-funded plan?

The main principles of fully insured versus self-funded health plans are the same: insurance carriers collect money to pay for your employee’s medical expenses. Every insurance contract has a different coverage extent and specifics contained in a policy or contract.

In fully-insured health plans, the insurance carrier assumes the financial risk for all medical expenses. In case the collected premium exceeds the claims paid, the insurance carrier keeps the balance. On the other hand, if the paid claims exceed the premium, the carrier loses money. The company pays the same premiums either way.

In contrast, self-funded plans do not transfer this responsibility or risk to a third party. Instead, the plan sponsor pays claims from the company’s assets. The plan sponsor is usually your company and the employees who are contributing to it.  

Related: Self-funded health insurance pros and cons

This health plan option supports insurance-like payments only from the participants’ perspective, obtaining funds from a medical trust built up through covered employees’ contributions and/or direct company funds. Both the employer and employees retain all surplus rather than losing those funds to a traditional insurance carrier.

Level-funded plans are underneath the self-funding umbrella. According to The Society for Human Resources Management, “With a level-funded plan, an employer pays a health carrier the same monthly amount to cover the estimated cost for expected claims, the premium for stop-loss insurance covers health care costs over a set dollar amount, and plan administration costs. If total claims costs are higher or lower than expected, the carrier makes adjustments at the end of the plan year in the form of a refund to the employer for lower claims or a premium increase on the stop-loss insurance renewal for higher claims.”

The next step in this guide to moving to self-funded health plans will help you understand this contrast even more.

Related: Self-funded health insurance pros and cons

What is a fully-funded plan?

With a fully-funded plan, an insurance provider assumes all policy risks rather than the employer, which means the carrier is responsible for the policy. The employer pays a fixed monthly fee to the carrier, which takes care of paying claims and administering the benefits on your behalf. 

Two reasons lead most people to think they have fully-insured health plans: 

  1. Almost everyone has a direct relationship with fully-funded companies (usually larger, traditional carriers), whether it’s auto insurance policies, homeowner’s insurance policies, rental insurance, among others. However, in health benefits, self-funding is popular. 

Employees may only know their employer chose the plan and partially or totally pays for it, without much control of how the rest happens. In other words, employees assume by default their health insurance carrier is similar to the company chosen to insure their homes and cars. 

  1. It is common for self-funded plans to use networks offered by large insurers such as Aetna, Cigna, or Blue Cross. Because of this, these carriers’ logos appear on policy documents and health plan ID cards, which leads people to believe they have insurance through the more traditional carrier, when the truth is they can only access their networks. 

Enrollees in fully-insured health plans pay fixed monthly premiums to their carriers. The carriers, in exchange, set these premium rates largely based on the number of people covered in a policy and an expected claim expense you have little to no control over. 

In this scenario, employers and employees pay much of the health package’s total cost, including the carrier’s profit margins and operating expenses, but have overall little influence on the prices and coverage.

Carriers then manage claims and coverage but keep any remaining money not used in actual claims paid during the year. To make it easier for them, traditional fully-funded carriers calculate plan premiums, adding up the items on the following formula:

  • Total projected claims: How much reimbursement money the insurance carrier estimates it will pay out within a year.
  • Charges for pooling: This is included to reduce volatility and liabilities as carriers take on larger policy-holder risks and groups of covered people.
  • Administration fees: For claims processing, medical management, facility, and prescription network usage, securing medications, and managing medical records, plus all other administrative activities.
  • Taxes: Insurance premiums can also be subject to taxes, which carriers must account for and add to the final rate. States have different health insurance regulations, compliance requirements, and medical policy requirements.
  • Profits: To remain in business, carriers must turn a profit, and they incorporate margins into premiums for this purpose.

Fully-funded health insurance providers can raise premiums regardless of whether claims are high or low. These plans give traditional carriers high-profit margins because of the way they work. Even if the cost of claims is low, employers and employees may still see rate increases year after year, making it difficult to forecast budgets.

What makes self-insurance different?

This guide to moving to self-funded health plans wouldn’t be complete without understanding the fundamental difference between self-insured plans and traditional options. While self-funding still pays claims and has incremental payments to deal with, the employer assumes policy risk instead of the carrier.

A customized self-funded plan allows you to collect contributions from your employees (if applicable) and chip in your payments into a reserve. A third-party carrier (or third-party administrator, TPA) will process claims using your assets and customize coverage by adapting it to your population’s specific needs.  

Self-funded health insurance gives you more freedom in designing your plan, selecting the coverage and networks to best suit your company’s requirements. There are also more benefits which include:

  • Employee Retirement Income Security Act (ERISA) – covered self-funded plans are not subject to the same pooling volatility as fully-funded plans because their participants are their “risk pool.” As a result, you won’t have to pay more to assume additional risk.
  • You can use any money left over from your premium payments to reduce contributions in the future or increase coverage. Even better, the insurance company does not make a profit off of your premium payments. Premium carriers will even return 100% of unused funds in the form of a rebate check or a credit at the end of the period.
  • Self-funded plans still have to pay for claims processing, stop-loss insurance (in the case of level-funded policies), and contract writing, whether they’re handled internally or by a TPA. However, these administrative fees tend to be much lower than those for fully insured plans.

Related: Level-funded health insurance pros and cons

Main reasons to switch to self-funded plans

Especially if you are a small or medium-sized business owner, you may be interested in exploring why moving to self-funded health plans is so attractive.

In the United States, most of the largest health carriers offer self-funded health coverage. They do so either through an ASO contract, a TPA they own, or a TPA that contracts with them. 

But it is worth knowing there are also many independent TPAs to choose from in the market. These companies tend to be more modern and agile in their service, offering flexible and more affordable benefits for your small business.  

The market is thriving, and business owners are finding increasingly more reasons to make the switch to self-funding:

  1. Pay-as-you-go approach: One key feature of self-funded health plans is that they allow for on-the-go claims reimbursements. Instead of making large payments in advance or installments, these plans reimburse claims as they go. Each month’s claim costs vary based on the care employees use, not on hypothetical calculations and unilateral projections from your carrier. 
  2. Freedom to pick plans and networks: A self-funded plan offers businesses the freedom to choose the plans and networks to suit their employees’ needs and budgets. In addition, companies can track claims directly with tailored analysis software. Employers can adjust coverage accordingly by following the first year as data-based healthcare inputs develop.
  3. Leverage savings: If claims are lower than expected for the month, it is not just good for you as the plan’s main sponsor; it is also suitable for all benefactors. Healthcare reserves can even earn interest when deposited into the correct account, and you could leverage these savings to design preventive health and wellness initiatives, for instance.

Before switching to self-funding, learn the risks

At this point, reading a guide to moving to self-funded health plans without knowing if there are any risks involved would be a waste of your time. 

First off, as briefly mentioned above, there’s the possibility of catastrophic (or excessively high) claims. Since the reserve fund was designed to only cover your employee pool for the year, these shock claims could deplete and surpass your available budget.

Self-funding becomes highly beneficial as far as there are no excess claim payments. Therefore, catastrophic claims are the most considerable risk to this healthcare coverage option. 

Top players in the industry have come a long way in designing solutions to compensate for this potential. This is where you may hear about stop-loss insurance, which activates in level-funded plans.

A self-funded plan with individual stop-loss or ISL reimburses you if any claim exceeds a predetermined cap amount. This prevents the policy from paying out any claims caused by individuals who went over the deductible amount.

Related: When employers should switch to self-funded health plans

The aggregate stop-loss policy is similar to an individual stop-loss policy. However, it protects against a selection of smaller claims while adding up to the policy’s total threshold amount rather than many severe ones. Once the total claims reach a predetermined cap, the aggregate stop-loss kicks in, at which point the plan reimburses the policy for overpayments.

Self-funded health plans are also subject to more risks associated with the people you want to cover, plus other factors. Whether self-funded healthcare is the best option for your business or not depends on the size of your employee population, the demographics of your staff, and the healthcare market you are in (or, basically, your company’s location).

Stop-loss insurance carriers are working diligently to expand self-funded plans beyond large companies and markets. Since so many innovations are underway to extend self-funded plans to smaller organizations, you may find a local carrier with the right self-funding option for you.

These companies could design plans to fit your unique business needs, even if your employee pool is small. 

Tax, fiduciary, and compliance considerations for self-funded plans

Before enrolling in a self-funded plan, consider how the following aspects may affect your policies.

  1. Tax considerations: In terms of taxes, claims, employee and company contributions are tax-free in self-funded plans. Also, self-funded insurance doesn’t have to pay certain federal and state taxes applicable to traditional fully-funded plans.
  2. Fiduciary considerations: State insurance laws do not apply to private self-funded benefit plans. These plans must remain compliant with federal benefits laws but are exempt from several specific state laws. Companies with self-funded health plans must name the funds’ trustees, responsible for supervising and managing their policies. These trustees’ names must be in the plan documents.
  3. Compliance considerations: Whether managed by an in-house employee or a TPA, their responsibilities as administrator and fiduciary fall within federal laws rather than state laws.

Which documents do you need to quote and move to a self-funded plan?

Traditionally, large insurance carriers require you and your employees to fill out piles of paperwork before even giving you a quote. These forms typically include extensive health questionnaires, as well as detailed information about past claims.

These companies often look for pre-existing health conditions that make people riskier insurance prospects. Carriers believe these individuals will make more frequent visits to the doctor and generate many claims. 

To gain more detailed information about your employees’ recent and ongoing treatment of specific diseases and conditions, they could even examine applicants’ medical records and prescription drug databases.

As explained above, there is little to no room for fee negotiation with these types of fully-funded carriers because they make it difficult to understand how they calculate their costs. 

Instead, with a more modern insurance company, a quoting procedure will only require your first and last name, email address, company’s name, and phone number, and how many employees you have. 

After you move forward, they could simply ask you for a brief employee census with each one’s name and last name, date of birth, home ZIP code, and gender.

These companies make the quote and health plan design process simpler, more straightforward, and more friendly by eliminating medical questionnaires.

Make your self-funded plan transitions easier

By partnering with a full-service self-insurance carrier that puts your company first, you can make your transition way easier while enjoying and managing your benefits becomes a breeze. 

Sana’s qualified experts will assist you throughout the process: from the moment you request a quote to the moment you get top-notch coverage your employees love. It all starts with a few clicks by requesting a quote now

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