Employers are drawn to self-funding because of the promise it holds to curtail costs, the freedom it provides to customize plans, and the desire to be unburdened by strict regulation. Regardless of whether or not you choose to move to a self-funded insurance option, it’s worth exploring this funding alternative so you can make the right decision for your business.
Self-funded health insurance is a form of employer-sponsored healthcare that doesn’t use traditional insurance carriers as a conduit for medical care. Instead, premiums are paid to the employer, which the company uses to pay for medical claims. Self-funding has traditionally been found in larger businesses, typically 1,000 employees or more, because they’re more likely to have larger reserves and cash flow to absorb a bad claim year than a small business.
The financial upside of self-funding is that employers get to keep any premiums which aren’t spent on claims. In a fully-funded environment, those savings are retained by the insurance company as profit.
The downside is that you’re opening yourself up to greater degrees of expense variability. In a low claims year, you’ll save money — but in a high claims year, you'll have to be prepared to absorb any overruns in healthcare expenses. Regardless, in our opinion, employee benefit expenditures should always be looked at over a multi-year time horizon.
Determining whether self-funded insurance is right for your business is a matter of the overall health of your workforce, financial discipline, and the amount of risk you’re willing to take on. The larger your workforce, the larger your premium pool and arguably the more diverse the overall health of this population. These are a couple of the reasons self-funding is so popular among large employers.
If you’re a small business with only a few employees, self-funded insurance can still work for you, but you’ll want to carry stop-loss coverage with narrower risk corridors to make sure you’re not leaving yourself exposed. You may also want to explore something called level-funded health plans, but they have their pros and cons and that’s a subject for another upcoming blog post. The bottom line is that you don’t want to be stretched so thin that you risk losing the business in a high claims year. And because you have so few employees, you won’t have a significant cash influx from employee premiums.
As long as employees stay relatively healthy and don't experience significant injuries, it can be cheaper for employers to self-fund their insurance coverage than to work with a traditional health insurance marketplace. However, an aging employee population or substantial employee medical expenses can devastate an employer's finances — especially for small businesses, which is why larger employers are more likely to take the risk.
Whether or not self-funded insurance is right for your company depends on many factors. It’s best to speak to your employee benefits broker before making a decision. They can help model out different scenarios and introduce creative risk mitigation strategies which make self-funding a real possibility.
Are you thinking of venturing into self-funded insurance? Leave us a comment below or contact us. We’d love to hear from you!