Self Funding

Is It Right for Your Organization?

Many employers have at least entertained changing their funding arrangements on group medical plans from fully insured to full or partial self-funding.  What are the pros and cons of this approach?

PROS

1. In a fully insured program, the employer transfers 100% of the risk to the insurance carrier.   By self-funding, employers agree to bear the risk of claims activity up to pre-determined levels (if stop loss protection is purchased.)  Instead of paying the insurance carrier the fully insured premium each month, the employer only pays “fixed costs” which are composed primarily of claims administration fees and stop loss premiums.  If the employer purchases DM (Disease Management) or other add-ons like PPO network fees, these are also included in the monthly fixed costs.  So, by only paying a portion of the total plan costs each month for fixed costs, the employer funds claims as they are paid (up to pre-determined levels) instead of “advancing” the entire fully insured premium to the carrier.
How is this a pro?  If the employer has good claims experience, they will be able to immediately participate in the savings by improving monthly cash flow.  These funds can then be reserved for future claim activity or diverted to other corporate uses. NOTE: When considering self-funding, take a hard look at your groups’ demographics.  Do you have a young, relatively healthy population, heavy male participation, with similar new hires coming on board regularly?  If so, then you are an excellent candidate for self-funding.  You can still have positive results even if you don’t have the most favorable demographics, but make sure you have advanced cost containment measures in place to control claims cost.   If you can get your hands on a three year claims history for your company, you can take a better look at whether this type of funding might actually work in your favor.  We recommend a retrospective analysis where the proposed stop loss deductible is superimposed on the prior experience to see how the plan would have fared if it had been self funded.
2. Taxes: Groups that are fully insured automatically pay state premium taxes of around 2% each year.  This goes away with self-funding with the exception of the state premium taxes that would be applied to the specific and aggregate stop loss premiums (more on this later.)
3. Better Plan Design Control: Self funded groups can typically design their plans with much more flexibility that fully insured arrangements where the insurance company generally dictates the plan design with certain variations permitted.  Additionally, self funding allows the plan sponsor to “carve out” certain benefits like pharmacy in order to achieve greater cost savings.  Groups with 1000 or more employees that are fully insured can do this also, but the medical premium typically takes “a hit” which in some cases can impact the potential savings that could have been realized by moving to the alternate PBM (Pharmacy Benefit Manager.)

Note that self funded employer groups also have greater ability to customize their plan designs to reflect changes in claims patterns than fully insured plans do.

CONS

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