Trend on the Rise: Mitigating Healthcare Costs With Self-Funded Plans
Published August 4, 2023
If your organization is evaluating how to keep employee benefits costs down without sacrificing quality, hunkering down for a potential recession, concerned about spikes in healthcare premiums, or curious about ways to reduce spending on medical insurance, then you may want to consider a self-funded health insurance plan.
Though self-funded plans have been around for a long time, organizations are increasingly gravitating toward this option due to economic and healthcare outlooks. Read on to learn more about what self-funded plans are, why more companies are considering this option, and whether or not it makes sense for your organization.
What are self-funded plans?
Self-funded plans, also known as self-insured plans or self-insured group health plans, empower companies to take charge of their employees' healthcare by assuming the financial risk of claims themselves. Instead of paying fixed premiums to an insurance carrier, companies set aside funds to cover their employees' medical expenses directly.
The best way to understand self-funded plans is to contrast them with typical insurance plans. With standard insurance arrangements, you pay a fixed monthly “premium” regardless of how many medical and pharmacy claims you have, and your cost is largely predictable month-to-month. That “premium” includes the cost of claims and plan administration, as well as carrier profits. You receive annual increases with little to no justification and zero ability to control costs without watering down the benefits you offer.
Self-funded plans, on the other hand, include a much lower fixed monthly cost for administration and introduce a variable cost for your medical and pharmacy claims. Because of the increased transparency and the fact that you are assuming some of your claims risk, you dramatically reduce the amount you spend on the carrier. You also have access to your healthcare information and can work with a consulting partner to mine that data for cost-savings insights and ways to better align your benefits with employee needs. More on that below.
Why choose a self-funded plan?
Self-funding provides transparency and control over healthcare costs. As discussed above, medical insurance carriers charge “all-in” premiums because of the variability in the risk they hold on behalf of a company, and because carriers have an incentive to make a profit.
“One of the big reasons that a group would want to self-fund is that they can all but eliminate carrier profits, actually understand why they spend what they do, and do something about it,” said Jason Jurgill, Newfront vice president of employee benefits. By closely monitoring claims data, and implementing proactive measures alongside an experienced consultant, organizations can save an average of 7 to 10% per year on self-funded plans versus fully-insured plans.
Self-funded plans also offer greater flexibility and customization options. Companies have the freedom to tailor their benefits package, design unique wellness programs, and implement cost-saving initiatives that align with their employees' needs. “In a fully-insured world, plan design options are often pretty limited because the carriers offer a set number of plans,” Jurgill says. “If you're self-funded, you have the flexibility to develop a plan that is tailored to your specific needs, not the needs of the medical carriers. You also have the ability to negotiate contractual language in your favor.”
In fully-insured environments, many companies don’t get any access to their data and have no idea what their claims are. With self-funding, employers can access data to customize plans and better serve their employees’ needs. “We have tools that identify and quantify savings opportunities,” Jurgill said. “For example, we might identify a pattern of diabetes in a population, we might see that costly medications are present that have generic equivalents available. Those data points can be used to layer in programs to address the costs and drive a better member experience, which is something you simply cannot do when you’re fully insured.”
What organizations are best suited for self-funding?
Though some organizations start self-funding when they have 150 to 200 employees, most don’t self-fund until they have more than 500 employees. “A group is about 90 to 95% credible—meaning that their population is large enough that their claims can be reasonably predicted year-over-year—when they have about 1,000 employees,” Jurgill said. “With stable claims predictions, it makes sense to pay for claims directly rather than paying a carrier a high percentage for holding that risk.”
Why is self-funding gaining momentum?
As companies face financial pressures and layoffs, they’re seeking cost-saving measures. What’s more, as healthcare costs skyrocket, companies are seeking innovative solutions to regain control over their benefits spend. “Everyone's looking for cost savings, but they want to maintain a high level of benefits, and self-funding is the way to do that,” Jurgill said. The rise of technology and data analytics has further fueled the trend—organizations want the power to make data-driven employee benefits decisions.
What are some considerations to make when self-funding?
Self-funded plans have more variable cash flow than fully-insured plans, particularly for companies with fewer than 1,000 employees. “In a fully-insured world, if your population never changes, you're paying the same amount in premium every month, regardless of what happens, so it's easier to budget for that,” Jurgill said. In contrast, with self-funding, “Typically, you’ll have months with very little claim volume and you’ll see that balanced by a few months with spikes, but net-net, it’s still cheaper than a fully-insured program.” Stop-loss insurance policies act as a safety net, shielding companies from catastrophic expenses. One version shields companies from losses on the individual level and another shields from losses on the aggregate level.
While fully-insured plans are easier to administer, you pay for that convenience. You also sacrifice flexibility and transparency. Managing a self-funded plan requires a few additional administrative steps, but it’s a trade-off most organizations are happy to make. “With the right partner and the appropriate guardrails in place, it’s something every employer with over 150 employees should strongly consider, especially in today’s economic climate,” Jurgill said.
If you’re interested in a self-funded healthcare plan, reach out to Newfront’s experts.
Newfront is a modern brokerage transforming the risk management, business insurance, total rewards, and retirement services space through the combination of elite expertise and cutting-edge technology. Specializing in more than 20 industries and headquartered in San Francisco, Newfront has offices nationwide and is home to more than 800 employees serving organizations across the United State and globally. For more information, visit newfront.com and follow us on LinkedIn.