Employee Benefits

Self-funding: The myths, the facts, and why your organization should consider it

Any HR professional can attest: Health insurance is expensive. Outside of 2020 when costs dipped, health plan premiums have increased an average of 5-7% per year for the past ten years. In 2021, premiums for employer-sponsored health coverage reached $22,221 for a family, with employee contributions covering an average of $5,969 of that expense. 

Currently, healthcare cost projections for 2022 are trending at the same 5-7% increase as in previous years. However, as people are attending long-overdue post pandemic medical appointments, employers are seeing high claims. This begs the question of whether that projection will hold–or continue to go up. In response, many employers with more than 100 enrolled employees are exploring the idea of self-funded healthcare plans. And for good reason. In this market, self-funded plans can be a strategic way to manage healthcare expenses, increase transparency, and create a better employee experience.

What is a self-funded plan anyway?

Self-funded plans are when the employer assumes the risk for employee healthcare costs. Rather than paying an insurance premium, the employer puts money–and any employee contributions–into a separate account. That account is earmarked to pay any claims that employees submit. Sounds scary, right? It’s not. Here’s why.

**What’s so great about self-funding? **

A self-funded plan can cost substantially less than a traditional plan because employers are only paying for actual claim expenses incurred. In fact, the likelihood of saving money compared to a fully-insured plan reaches 95% over a five-year period. We worked with one 850-person company that saved over $1M in the first year alone.

Self-funded plans are also far more flexible and transparent than their counterparts, enabling employers to tailor these plans to meet the needs of their particular workforce. The company also maintains control over the reserves, which means the company–not the insurance company–has the potential to earn interest or other investment income from money in the account. Overall, self-funded plans can be a great option for employers that are looking to mitigate rising costs while providing employees with quality coverage.

How do I do self-funding right?

To get the benefits of a self-funded plan, plan execution must be done right. This means employers must work with a team of experts to get the right plan design and budgeting rates, or premium equivalents, in place. Budgeting rates are based on fixed costs and projected claims. From there, the employer can determine employee contribution rates and transfer the right amount into the healthcare account every month. However, it’s important to watch for fees, as there are often many hidden in the fine print.

In addition to accurate plan projections, employers must hedge against the risk of a massive claim wiping out reserves. As more employers have turned to self-funded plans, stop-loss insurance has become more popular. In fact, stop-loss insurance has increased 10% every year for the past four years. Stop-loss insurance protects employers against unpredictable losses. It kicks in and begins to pay after the predetermined amount the company will pay for claims has been reached. With stop-loss insurance, employers have peace of mind knowing their overall liability is capped and they are protected in the event of a catastrophic claim.

Stop-loss insurance is unique to every company, and it’s important that every contract be aligned with the plan sponsor’s objectives. Read the contract carefully, check for exclusions, and make sure it’s the right policy–and plan–for the company.

At Newfront, we take the guesswork out of self-funding. Our tailored plans are developed by our advisors and in-house data analytics team so our clients have clear insights into plan design, costs, and steps. We aren’t into surprises–and we know our clients aren’t either–so our transparent approach gives our clients the clarity they need to decide if self funding is right for their organization.

Want to know if self-funding is right for your organization? Connect with your advisor to get a tailored, data-driven analysis so you know exactly what you’ll be paying.

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