Historically, employers have turned to the self-funding of their health plans when traditional insurance programs failed to meet their cost expectations. The many thousands of employers in the U.S. who have implemented self-funded medical programs later discovered the other advantages such as coverage flexibility and client-specific benefit plan administration.
A self-funded (or self-insured) plan is one in which the employer assumes the financial risk for providing healthcare benefits to employees. In practical terms, self-funded employers pay for claims out-of-pocket, as they are presented, instead of paying a pre-determined premium to an insurance carrier for a fully insured plan.
Self-funding is one of the most effective ways employers can control the rising costs of healthcare coverage. In understanding self-funding as a concept and how it differs from fully insured products, we’ve provided you with some key guidelines on the structure of a self-funded plan.
The benefits of partially self-funding are vast and include:
Elimination of most premium tax. There is no premium tax on self-insured claim expenditures. Premium tax is applied only to the stop loss premium, which is a fraction of a fully insured premium.
Lower cost of administration. Employers find that administrative costs for a self-insured program administered through a TPA are significantly lower than those included in the premium by an insurance carrier or HMO.
Carrier profit margin and risk charge eliminated. The profit margin and risk charge of an insurance carrier/HMO are eliminated for the bulk of the plan.
Claims administration. The TPA should provide fast, efficient claims service. The employer should be provided an electronic enrollment option. ID Cards should be provided within 72 hours of request.
Customer service. The employee should have access to a toll-free telephone number and a dedicated customer service team. Claims and eligibility information should be available over the Internet.
Cash flow benefit. The employer’s cash flow is improved when money formerly held by the insurance carrier in the form of reserves, for unreported and pending claims, is freed for use by the employer.
National provider network. The TPA should offer a national, integrated program of PPO networks for multi-state employers.
Control of plan design. The employer has complete flexibility in determining the appropriate plan design to meet the needs of the employer and employees. The employer can redesign its plan at any time.
Mandatory benefits are optional. State regulations mandating costly benefits are optional because self-funding is regulated by federal legislation only.
Cost reporting. The TPA should provide a monthly detailed reporting of costs, by department or location, and by type of medical service. Utilization and lag reports should also be available. Fund disbursement journals should be provided electronically.