Insurance agency competition is higher than ever, challenging brokers to develop additional strategies to differentiate themselves from the rest of the pack. One of the best ways to help your agency stand out is to provide a simple solution that saves your clients money on healthcare costs.
Self-funded plans can make healthcare more affordable for employees while helping employers identify the most cost-efficient care strategies without sacrificing care quality. However, as a broker, it’s important to educate yourself on the advantages and disadvantages of self-funded health plans to ensure a self-funded plan will work to your client’s benefit.
Plan designs and incentives should align with the culture and outcomes the business owner and employees desire. Use our complete broker’s guide to self-funded healthcare plans to get started.
What should brokers consider before offering self-funded healthcare plans?
If you are weighing the potential of working with organizations on self-funding healthcare plans, consider the following:
Suitability: Ensure that working with employers that are looking to self-fund their insurance plans is suitable for your brokerage. Make yourself an expert on:
- Plan design
- Summary plan descriptions (SPDs)
- Summary of benefits coverage (SBCs)
Establish your ideal client: Self-funded healthcare plans are best suited for the following clients:
- Businesses with 20 or more employees
- Businesses searching for more control over health benefits and costs
- Businesses with solid financial stability and resources that are confident they can pay employee medical claims
Know the pros and cons: Self-funded healthcare plans are optimal when it comes to two things: plan design flexibility and negotiating lower rates. Self-funded plans also carry with them some risks, including the possibility of higher claims costs, but only if employers fail to set aside the amount of money needed to pay claims. Because of this, it is essential that employers know both the benefits and risks of self-funding.
Communicating both the risks and benefits to clients establishes you as a trusted and transparent expert on self-funded healthcare plans.
Collaborate on plan design and implementation: Consult with your clients that choose to take the self-funded health plan route on plan design and implementation to ensure you determine the right level of stop-loss coverage and make the best selection for a third-party administrator (TPA) to process and pay claims.
Ongoing support: Brokers can extend support to self-funded health plan clients by offering the following services even after the plan has been set up:
- Overseeing employer claims experiences
- Backing renewal negotiations
- Consulting on adjustments to the client’s plan design
What is a self-funded healthcare plan?
Self-funded healthcare plans are a type of health insurance where the employer can save money on healthcare rates but takes on the financial risk of providing coverage for their employees. The employer pays for employee medical claims through a designated claims fund such as an HRA (health reimbursement arrangement).
Self-funded healthcare plans are a way for organizations to run their own health plan. This allows the employer to more easily meet the unique needs of their employees while having more control over their health plan and increasing cash flow.
With a self-funded health plan, employers create the plan design and calculate the fixed and variable costs of the plan, including fees such as:
- Administrative service fees
- Stop-loss premiums
- TPA fees
- Staff management
- Software fees
Are self-funded healthcare plans American Care Act (ACA) compliant?
Self-funded health plans are still required to adhere to several ACA provisions, including limits on out-of-pocket costs.
Applicable large employers (ALE) with a self-insured medical plan will be required to complete Part III of the Form 1095-C to report the coverage for employees and any covered dependents. Self-insured health plans of non-ALEs require that employees be provided with the Form 1095-B to report coverage.
Is a self-funded plan an Employee Retirement Income Security Act (ERISA) plan?
Yes, a self-funded health plan must be an Employee Retirement Income Security Act (ERISA) compliant health plan. Self-funded healthcare plans are not subject to state laws that would regulate the operation of these plans, therefore ERISA regulation requirements are applicable under federal laws.
Is self-funded the same as administrative services only (ASO)?
Yes, self-funded health plans are the same as ASOs. Both of these require that the employer take on the financial responsibility of employee medical claims.
How does a self-funded healthcare plan work?
Self-funded healthcare plans typically work like this:
Employers set aside money for medical claims: Employers should set aside money in a fund designated specifically for employee medical claims. We recommend employers take 50% of their savings and create what we call a “sinking fund,” or cash reserves fund, to build their self-funded HRA or other designated fund.
Organizations may determine the appropriate amount to set aside based on the following factors:
- Number of employees
- Employee demographics
- The types of benefits offered
Employers contract with a TPA: Employers should contract with a TPA to process and pay claims. The TPA is responsible for:
- Verifying the eligibility of claims
- Negotiating rates with healthcare providers
- Paying claims on behalf of the employer
Employers purchase stop-loss insurance coverage: We recommend that employers purchase stop-loss insurance to ensure that they are protected against unpredictable or catastrophic claims. With stop-loss coverage, the employer is not liable for claims that might exceed a set amount.
Employees receive healthcare coverage: All healthcare services are available to employees, including:
- Doctor’s appointments
- Preventive care
- Hospital stays
All of these benefits are available in addition to employees seeing around a $200 savings increase in their payroll deduction, as compared to employers using traditional health insurance. Additionally, with self-funded healthcare plans, employees may see options for higher-quality healthcare services.
Employer reimburses the TPA: When an employee utilizes their health benefits, the TPA might cover those expenses on behalf of the employer, in which case the process would work like this:
- The employee incurs a healthcare expense
- The employer submits the claim to the TPA
- The TPA verifies the claim eligibility
- The TPA pays the healthcare provider
- The employer is reimbursed for the claim from the HRA (or other designated fund)
Employer HRA (claims fund) adjustment: It is important for the employer to regularly check the amount of money set aside in the HRA or other designated claims fund in order to make necessary adjustments based on claims experience.
Upon reviewing the funds, the employer may find claims are lower than expected, in which case the employer organization may be able to utilize the excess funds in other areas of the company. On the other hand, if claims are higher than expected, the employer might supplement the fund in order to pay claims.
Self-funded plans through Redirect Health
While many self-funded plans require employers to locate TPA, stop-loss, and HRAs separately from their healthcare plan, Redirect Health provides all of these services in one. This makes it much easier for employers to manage the full scope of their healthcare plan under one roof.
What are the advantages of a self-funded healthcare plan?
There are several advantages to self-funded healthcare plans for employers, including the following.
Cost control: Self-funded healthcare plans offer more possible cost savings to employers compared to traditional health insurance policies by:
- Directly paying claims
- Negotiating rates with healthcare providers
- Reducing overall health coverage costs for their employees
Plan design customization: Because self-funded plans are not bound by state insurance regulations, employers are able to design their plans to meet the specific needs of their organization. Additionally, employers can more readily make changes to their plans because they have more control over plan design than with traditional health insurance policies.
Saving on premiums: Employers have the opportunity to save on premiums by going the self-funded health plan route because self-funded healthcare plans are not subject to state premium taxes.
Unlimited healthcare/cost transparency: Self-funded plans allow employers a 360-degree view of their healthcare plan at all times. Employers can see:
- All HRA or other designated claims funds
- All healthcare claims
- The exact amount being spent on claims
- Exactly where their money is going
This level of visibility allows employers to consistently see where their money is going, when, and why and allows them to monitor costs and reallocate funds as needed.
Cost benefits: There are a lot of cost benefits that come with a self-funded healthcare plan, including:
- No upfront premiums
- Lower administrative costs
- Lower taxes, as there are no state taxes associated with self-funded healthcare plans
Without these typical costs, employers will be able to see an increase in cash flow. Additionally, if claims are lower than expected, employers can take unused money from the claims fund and reinvest it back into their business.
What are the disadvantages of a self-funded healthcare plan?
While self-funded healthcare plans offer many advantages to employers, they also carry some risks and disadvantages, including the following.
Higher-level complexity: Because of their flexibility, self-funded healthcare plans may be more complex and nuanced and take more time to navigate than a traditional insurance plan.
Possibility of higher claims costs: If health claims are higher than expected, the employer will see higher costs. This may require the employer to increase the funds set aside to pay claims. With the employer taking responsibility for employee claims, this is the largest risk associated with self-funded healthcare plans.
Cost fluctuations: Self-funded health plans may lend themselves to unpredictable cost fluctuations, as employers are fronting the cost of employee health claims. These cost fluctuations may also make yearly budgeting and expenses unpredictable.
Administrative cost: Whether it’s time or money, implementing a self-funded healthcare plan will cost employers in administration. The employer must have a knowledgeable or possibly additional administrative team in place to help manage the tasks associated with maintaining a self-insured health plan.
Redirect Health, as the Program Manager, is here to help wherever needed. Our team is responsible for:
- Managing the HRA fund
- Contracting and communicating with the TPA
- Processing and paying claims
- Stop-loss insurance coverage
Liability: Because there is more potential for error in self-funded healthcare plans, there is an increased risk of federal regulatory penalties and lawsuits. If an employer decides to take the self-funded route, it is critical that the broker assists in overseeing plan design to ensure all regulations and requirements are being met.
Lack of protection from state insurance regulations: Self-funded healthcare plans do not have to meet state insurance regulations that are in place to protect consumers. If something were to go wrong, employees would have little to no state protections in comparison to a traditional insurance policy.
Not best suited for the self-employed or smaller employers: Self-funded healthcare plans typically require an increased level of financial stability to maintain a solid HRA or other determined funds for health claims, making them a less ideal option for those who are self-employed or who have few employees.
May not be ideal for all employees: Some employees may not meet the ideal demographic for self-funded healthcare plans, particularly for employees who have more advanced healthcare needs.
When employees garner increased claims costs, it might cost the employer more than it would to pay premiums with traditional insurance. For employers looking to self-fund their insurance, it’s worth considering the health of the organization’s employees.
How is a self-funded healthcare plan different from a fully insured plan?
A self-funded healthcare plan involves the employer taking on full responsibility for the health claims of its employees as they occur, whereas a fully insured health plan is where the employer pays a premium to its health insurance company monthly to cover claims.
There are some important differences between self-funded and fully insured healthcare plans, including the following.
Risk/cost analysis: It’s important for employers to weigh the financial risk associated with self-funded healthcare plans that might not be present with traditional insurance plans.
Unlike with a fully insured plan, the employer itself takes on the financial risk of paying employee health claims. With traditional health insurance plans, employers pay a set premium.
Plan design: Self-funded health plans offer more in terms of flexibility with plan design. This is because self-funded plans do not have to adhere to state insurance regulations like traditional insurance plans do.
Employers are able to control more of the benefits they offer and easily make plan changes. Traditional health plans are obligated to adhere to state insurance regulations, which results in less flexibility in plan design.
Administrative responsibility: Unlike traditional health insurance plans, self-funded health plans are developed, overseen and managed by the employer. This additional work may constitute new or existing administrators within the organization to take on excess work to perform the duties associated with a self-funded plan and communicating with a TPA.
Company fit: Self-funded health plans are best suited for employers with 20 or more employees. While they offer a lot of great benefits, self-funded health plans will not be the best option for every type of employer, whereas traditional insurance plans can work for all business sizes.
How is cost managed in a self-funded healthcare plan?
There are several ways that cost is managed in a self-funded healthcare plan, such as:
Setting up an HRA or other designated claims fund: The employer is the sole determinant in how much money is set aside in the claims fund. As mentioned above, the employer should base this amount on the following factors:
- Number of employees
- Employee demographics
- Benefits offered
The employer can adjust the amount set aside accordingly as they gain more experience with the plan and employee claims.
Rate negotiation with healthcare providers: Self-funded healthcare plans, unlike traditional insurance plans, offer employers the opportunity to consult with healthcare providers on the price of healthcare services. This is because the employer is the party directly paying the claim instead of paying premiums to an insurance company.
With the possibility of lower-cost healthcare services, there is also the possibility of lower overall health coverage cost.
Purchasing stop-loss insurance: One of the most important things an employer considering a self-funded health insurance plan can do is purchase stop-loss insurance. By covering unprecedented claims, stop-loss insurance can protect organizations from some of the costly risks of self-funded health insurance plans.
There are two types of stop-loss insurance coverage:
- Specific stop-loss coverage: Specific stop-loss coverage protects employers from high claims from any individual employee.
- Aggregate stop-loss coverage: Aggregate stop-loss insurance coverage is a cap for the total dollar amount that an employer would pay over a certain period of time. Aggregate Stop Loss is included in your Monthly Premium.
For most companies, it is recommended to protect their self-insured health plan with both types of stop-loss insurance coverage.
Utilizing a TPA: A TPA is a company that works on behalf of the employer to:
- Process and pay claims
- Verify eligibility of claims
- Negotiate healthcare service rates with providers
- Use review programs to ensure that healthcare services are necessary
Creating cost-saving strategies: Employers should get creative in developing a multitude of cost-saving strategies across the company, including:
- Promoting generic prescription drug usage
- Utilizing reference-based pricing for healthcare services
- Implementing wellness programs
- Incentivizing healthy habits and preventative healthcare
Can individuals set up self-funded healthcare plans?
Self-employed individuals and organizations with 20 or more employees may be eligible for self-funded healthcare plans. While it may be more complicated and costly, some individuals may also be able to set up a self-insured health plan on their own.
Generally, self-insured health plans are more commonly offered to the following types of employers:
- Small businesses or businesses with 20 or more employees
- Businesses looking for more control over their health coverage
- Business looking for more customizable options in their health coverage
- Businesses looking for more control over their health costs
It is always good to keep in mind that self-insured healthcare plans are still required to meet rules and regulations set by the ERISA and other federal insurance laws. Some of these rules and regulations include covering:
- Breast reconstruction following mastectomy
- 48-hour hospital stays following childbirth (or 96 hours following a C-Section)
How do self-funded healthcare plans impact employee benefits?
The main advantage of self-insured health plans is flexibility. This flexibility gives employers and employees alike access to customized coverage and benefits that better fits their needs.
Employees may also see benefits like:
- Wellness and fitness discounts and incentives
- No yearly premium increases
- Access to higher-quality medical care
- Lower prescription drug costs
- Being a wise healthcare consumer
Self-insured healthcare plans can be much less expensive than the typical fully insured plans, particularly for small businesses or groups with relatively healthy employees.
Businesses with a younger, healthier demographic of employees may benefit more due to having lower claims costs. Additionally, businesses may create a plan design that incentivizes employees to take measures in preventative care to lower claims.
With the employer taking on the financial risk of medical claims, the employer may be able to negotiate with healthcare providers for lower rates on healthcare services.
With a self-funded healthcare plan, it is possible for employees to see around a $200 savings on their payroll deductions due to the employer taking responsibility for the medical claims of its employees.
How should employers introduce self-funded healthcare plans to employees?
It is important that employers discuss their self-insured plan design and implementation with their employees. Employers should be honest and attentive to their employees’ questions.
Here are some tips for how employers can introduce self-insured health plans to their team:
Ease into education: Employers should slowly begin to offer regular educational opportunities to their employees for them to learn more about their new health plan. We recommend that the employers break down the information into chunks over time that may be more easily interpreted and understood.
Transparent communication: Employers should be up front with their employees about any changes being made to their health plans. Employers should be open to any questions that employees might have about their new health plan.
Highlight flexibility: The employer should focus on the benefits that employees will receive from the organization taking a self-insured route, such as any wellness and fitness incentives, no yearly premium increases, lower healthcare costs and better quality care.
The Bottom Line
Both employers and employees have the opportunity to benefit from self-insured healthcare plans. This guide can help to steer your clients through the process of building and maintaining a self-insured health plan that will provide beneficial results.
Redirect Health is committed to helping you grow your agency by providing your clients with a better solution to simple and affordable healthcare. Visit our broker page to learn more about our broker program and to request an instant quote for your client.