Employers frequently switch to self-funded health insurance to lower healthcare spending, customize benefit offerings, and gain insights into their claims data.
With employer health costs rising year after year — jumping almost 50% over the last 10 years alone — employers increasingly turn to self-funded health insurance plans to drive financial savings, enhance plan flexibility, and upgrade employee benefits.
Today, nearly 70% of U.S. workers receive coverage through self-funded health insurance plans, up from 44% in 1999.
What is Self-Funded Health Insurance?
In short, self-funded employers pay for claims, after employee out-of-pocket costs, as they occur rather than paying a fixed monthly premium for fully-insured coverage. The self-funded employer takes on the financial volatility for covering the costs of employee health benefits, but enjoys greater flexibility to personalize benefit offerings for their unique populations.
Think of self-funded insurance like your water bill, where you only pay for the water you use, whereas a fully-insured plan is more like your Netflix bill, where you pay the same rate no matter how much (or little) content you consume.
How Does Self-Funding Health Insurance Work?
With a self-funded plan, the employer sets aside funds to cover the expected claims, and works with a third-party administrator to process the claims. Rather than paying a monthly premium to the insurance company, the employer only pulls from the fund as employees seek care. This allows the employer to typically come out ahead financially versus the cash flow and costs of a fully insured plan
With a fully-insured health plan, the employer pays a set monthly cost to the insurance company, who in turn processes and pays for the claims. The rate remains fixed for the full term, regardless of the number of claims or extent of the services employees receive.
Fully-insured plans invite less volatility risk due to the fixed monthly payment, yet these plans often lock employers into steep rate increases, and return potential savings back to the insurance company.
“On the fully-insured side, there’s typically a 12-month rate guarantee, but there’s still risk because if the plan performs really poorly, you’re going to get a massive increase,” says Paul Ashley, Senior Vice President at First Person Advisors a Subsidiary of NFP, a benefits and compensation advisory firm based in Indianapolis.
What are the Advantages of Self-Funded Health Insurance?
A well-managed self-funded health insurance plan offers several perks, notably by diverting financial savings to the employer, and offering greater benefit plan flexibility and personalization due to different regulations that self-funded plans are able to follow and not the state’s department of insurance in which they are domiciled.
Self-Funding Unlocks Health Plan Savings
Because self-insured employers “pay as they go,” they can potentially achieve significant savings if actual claims fall below their estimated claims. They can reinvest the savings back into the business, lower employee premiums, or expand coverage and employee benefits.
“The belief is that if you can help manage the health of the population and have a healthier-than-average workforce, you get to hold the margin, not the insurance company,” Ashley says.
Additionally, self-funded employers pay 15% to 20% less in administrative fees, and see increased cash flow by eliminating the pre-payment of monthly premiums.
Self-Funded Insurance Allows for More Flexibility, Personalization
“Another reason employers choose to be self-funded is that they want access to better data, and they want better control over how the plan is administered, organized, and designed,” Ashley says. “Because when you’re fully insured, the insurance company owns the risk, so they design it a certain way, and it’s a little bit of a take-it-or-leave-it approach.”
Self-funded employers enjoy the freedom to better personalize their health offerings to match their unique populations, personalize care to drive better health outcomes, and adapt care delivery in real-time as new challenges emerge.
“When you’re self-funded, you get a lot more control over how it’s designed,” Ashley says. “You have the ability to pull different levers to contain costs or make the benefit more generous. You don’t have those same controls on the fully-insured side.”
Employers often use their savings and increased flexibility to introduce extra health benefits, such as access to onsite health centers that offer advanced primary care, wellness services, behavioral health support, chronic condition management, and virtual care. These additional offerings can drive further savings—by as much as $2,000 per employee, according to Marathon Health data—while improving health outcomes and offering exciting employee perks.
Are There any Drawbacks to Self-Funding Health Coverage?
Because self-funded employers pay for claims out of pocket, they need the cash flow to pay for their obligation. It can create risk—and may not be practical—for smaller employers who lack the funds to cover the expense.
With healthcare wildly unpredictable for any organization, self-insured employers typically carry stop-loss insurance to cover catastrophic claims or pay for expenses that exceed funds previously earmarked to cover employee healthcare costs.
Considerations for Switching to Self-Funded Insurance
For any business considering the switch from fully-insured to self-insured, Ashley suggests performing a full market analysis to understand the true costs of the fully-insured plan versus your actual claims data.
You also need to ensure adequate cash flow to pay for your estimated claims and purchase reinsurance or stop-loss insurance to cover catastrophic claims.
Most importantly, Ashley suggests working with a third-party administrator who values data and analytics, and not only provides a clear window into real-time claims data, but looks forward and predicts future risk, too.