There are two fundamental ways for employers to pay for health care for their employees: Fully insured means buying health care insurance at a fixed cost with no annual opportunity to save money if your employee population experiences low usage. The alternative of self-funding offers the possibility that the company could spend less under some circumstances. In a fully-insured scenario, the employer assumes no risk after paying the premiums negotiated with the insurer. In contrast, self-insured companies must pay all costs that employees incur for their medical care (usually from a fund that the company creates with a combination of corporate contributions and the amount that the employees must contribute.)
For companies considering a self-funded health care model, one incentive is usually the opportunity for financial gain. If the employees have a lower incidence of expenses, the employer spends less. There are other advantages to consider as well:
Customization. Many insurance plans are not flexible, leaving corporations with benefits and options they can’t change to fit their needs. By self-funding, the company can provide the program it prefers for the workforce.
Cash flow and interest income. The funds designated for health care costs remain in the company’s control until they need to be spent, reducing cash flow, and maximizing the potential for investment or earning interest.
Exemption from individual state health insurance requirements. Self-funded health plans fall under ERISA (Employee Retirement Income Security Act) governance. As a result, companies with operations in multiple states can craft their coverage without individual state compliance issues. They will also save a small percentage by avoiding state taxes on health insurance premiums.
While some smaller employers may not have the reliable cash flow to respond to the variable financial demands of self-insurance comfortably, some find it economically rewarding. In addition, small firms considering the option may want to assess their demographic before deciding since current employees with expensive health concerns could influence the analysis outcome.
TPA is the abbreviation for third party administrator, an outside company that takes over the processing of medical claims and payments for a self-funded or level-funded health care plan. While some large firms administer their health operations internally, most do not. Instead, they contract the work to an expert who can collect the premiums, review, process, pay claims, and even negotiate preferred pricing for services.
The potential for astronomic costs is the main barrier for some companies considering self-funding, especially smaller organizations. For some, a handful of significant claims could demolish any savings from the strategy and threaten the company’s financial safety. As a result, most self-funded companies purchase stop-loss coverage to reimburse them for expenses over a specific dollar amount.
The stop-loss provision is a hedge against circumstances that are too costly to be absorbed by the organization. For example, suppose that a small employer with a history of low costs unexpectedly has several employees in the same year with high expenses. The stop-loss insurance will limit how much the company must spend overall that year. However, it’s worth noting that the company’s cash flow and reserves can still be disrupted by bills that come in inconvenient waves but don’t exceed the overall threshold.
Level-funding health care is like a hybrid solution for companies seeking a way to stop paying high premiums but anxious about the unpredictability of self-funding. With a level-funded approach, the employer pays a third-party administrator the amount expected to be necessary for medical claims, plus the stop-loss premium and an administrative percentage. That way, the employer has the security of knowing what the monthly outlay will be. At the end of the year, if the actual costs were lower than expected, the employer will get a refund. If the actual costs were higher, the stop-loss provision would cover the difference, but the administrator will increase the premium.
The 2021 Kaiser Family Foundation Survey on employer health benefits reports that self-funded and level-funded plans have become increasingly popular, particularly with small companies. At Taylor Benefits Insurance, we can help you sort out the potential costs and benefits of competing options and determine the best strategy to save money while providing your team with the health care coverage you want.
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