An Introduction to Self-Funding
What is Self-Funding?
With a self-funded health plan, employers fund the costs of their employee benefit program and assume the responsibility for paying employee claims. Typically, they retain a third party administrator (TPA) to assist in providing administrative services for the operation of the health plan including enrollment, eligibility, claims processing and payments, COBRA, appeals, and other similar services.Self-funded health plans typically provide an employer greater control over the design, administration, and funding of their health plan.
In addition, self-funded health plans are generally not subject to state insurance laws and regulations or most state health insurance premium taxes. Self-funded health plans are governed under Federal Laws and Regulations such as ERISA and HIPAA. This results in a potential savings of up to 4% over a fully insured health plan. Other savings are realized through flexibility in choosing plan design options, total access and control over plan data, and the ability to customize all aspects of the health plan.
Advantages of Self-Funding
Lower Employee Premiums - According to the Employer Health Benefits 2010 Annual Survey by the Kaiser Family Foundation, employees in companies that have a self-funded benefits plan pay lower single/family premiums than workers in firms that are fully insured.
Plan Control and Design – The employer retains full control and customization of their health plan's design. This allows employers to create a custom plan that best accommodates their employees' unique health needs and requirements.
Removal from State Mandated Benefits – Unlike fully-insured plans, self-funded employee benefit plans are governed under ERISA (Employee Retirement Income Security Act of 1974) and exempt from most state insurance laws and rules, mandated benefits, reserve requirements, and premium taxes.
More Cash Flow Control – Under a self-funded plan, monthly plan payments for claims are no longer “pre-paid” to carriers in the form of premiums and reserves. Claims are only paid as they are received by the TPA and billed to the plan. Employers therefore will have access to cash reserves they previously would have been unable to access. Furthermore, if claims are lower than expected, the employer retains every dollar of the savings, savings that would have previously gone to their carrier’s profits.
Better Data – Another benefit of a self-funded healthplan is that an employer’s financial risk is limited to claims for its own members and not commingled with the carrier’s risk pool. In addition, rates and renewals are based on the plan’s own experience and not on national morbidity tables or pools used by most fully insured carriers.
Decreased Operating Costs – Administrative costs for self-funded plans are generally less than those for fully insured plans. The main reason is that the employer is no longer paying for the insurance carrier’s overhead and profit margin.