There is nothing magical about health and dental insurance costs. Under a fully insured plan the underwriters calculate the anticipated claim costs, inflate this amount to provide a cushion, add on administrative costs and establish a group’s premium rates. These premiums form a fixed cost for the employer.
Under a self-funded approach, the employer assumes the risk for claims incurred and paid on its employees and their covered dependents. The employer would pay a fixed cost for the administration of the plan using a Third Party Administrator –TPA, or through an Administrative Services Only (ASO) arrangement with a major insurance carrier. In addition, reinsurance coverage is purchased to protect the company against an extremely large claim or a multitude of lesser claims. Premiums for this protection would provide two forms of insurance:
Specific Stop-Loss Protection
An insurance policy is purchased through a reinsurance company to protect against any individual claims. The employer would accept the risk on any one individual during the plan year up to this amount (typically $60,000, $70,000 or $80,000). The reinsurer immediately reimburses claims that exceed this amount, during the plan year.
Aggregate Stop-Loss Protection
An additional insurance policy is purchased to protect the Company against the total number of claims that may be incurred and paid during the plan year. The reinsurer establishes monthly claim factors for single and family coverage. Similar to fully insured premiums, these are multiplied by each month’s actual enrollment to establish a year-end maximum amount. Should all claims under the Specific Stop-Loss level exceed this amount the reinsurer accepts the responsibility for the balance.
Self-funding is especially beneficial for an organization that expects to grow. When a new employee is hired the minimum amount of time before that person or his/her family member to generate a paid claim is usually 3-4 months. Under a fully insured program the entire premium is paid to the insurer from day one. With a self-insured plan only the minimal fixed costs are paid until such time as a claim is actually generated.
Other advantages to include:
Increased cash flow
Potentially significantly lower costs, depending on actual claims
Lower administrative costs
Flexibility in plan design
Ability to control “Reserve” dollars normally held by the insurance company.
Disadvantages to self-funding would be:
Inability to predict exactly when claims will actually be incurred
Although an employer maintains his own reserve fund, he is also responsible for the Run Off Claims, should the plan be terminated.
Finally, it should be noted that in the event of a high claims year, the reinsurer will increase the following year’s maximum liability. Similarly, under a fully insured plan, premiums will be increased for the upcoming year. The difference in self-funding is that this increased potential cost is not paid unless warranted by the actual claims.