Do You Look At Your Health Benefits Like Car Insurance or Your Electric Bill?

But most employers with less than 1,000 employees fully insure their medical and prescription drug benefits. The fully insured employers fall into the car insurance payment model – they’re paying based on the insurance carriers’ book of business usage versus the actual health services their employees use. In many cases, individual employers are paying a disproportionate share of costs, relative to their actual experience, as a result of this "community" pricing model.

In addition, self-funded plans can benefit from the savings of lowered administrative costs, no state premium taxes and lower overall retention — putting that money back into the employer’s pocket.

Of course, there is a risk. Your plan could incur much greater costs if you switch to self-funding if your claims run higher than expected. There are ways to mitigate that risk. First, take a look at how much your company is paying in claims versus premiums. If less than 75 cents of every premium dollar spent is going to claims, your plan could be a good candidate for self insurance since you likely have lower than "average" claims costs. Second, you can protect your plan from exposure to high claims through stop loss reinsurance.

As few as 10 years ago, it was thought that only companies with 500+ participants were good candidates to self-fund. Today, many employers of all sizes completely self-fund their medical programs, reap the associated financial rewards and do not look back on their decision. There’s still a "rule of thumb" for fully self-funding medical benefits, but the bar is significantly lower, with plans covering as few as 50 lives enjoying the advantages of self-funding.

Self-funding isn't a fit for all firms. Some employers don't want to accept the level of risk or deal with the month to month fluctuation in cost. Others have gone part way toward self-funding their medical program by paying for the first several thousand dollars in claims cost for each participant through a self-funded arrangement and purchasing a fully insured high deductible health plan for catastrophic coverage. This can save premium dollars while covering large claims through the insured portion of the plan. This approach mitigates cost volatility and as such can be an attractive alternative for smaller employers.

There is a word of caution on this partial self-funding approach. Insurance carriers carefully monitor the "self-funded" portion of the plan to ensure that the level of employee participation (e.g. employee out of pocket expense) is sufficient to incent prudent consumer behavior that is factored into the underwriting of the high deductible plans. In designing the plan, the requirements of the various insurance carriers in your market must be taken into consideration to ensure sufficient expected savings.

Another "baby step" toward self funding can be to carve out and self-fund your prescription drug plan. Check with your medical carrier first — some carriers will not allow the drug plan to be separated from the medical plan. Also, smaller employers should check with their consultants to learn about trends in their local markets. Employers who can carve out programs such as prescription drug coverage may experience significant savings from this move and also obtain a wealth of information that will allow them to more effectively manage their overall health program.

There are multiple options for employers of all sizes to potentially save money through alternative funding approaches. Working with your consultant to explore these options may give your company the opportunity to shave significant expense off your health program bills.

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