Everyone is looking for ways to save money on their healthcare costs — especially employers, who are shouldering a large portion of the burden when it comes to insurance premiums. If you’re looking into self-funded insurance options, you’re certainly not alone. Self-funding is surging in popularity among companies of all sizes, including those with as few as 50 employees.
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.
What is Self-Funded Insurance?
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.