For most employers with fully insured programs, the handling of medical claims has become a dollar swapping proposition. Under a conventional program, premiums paid to an insurance company are used to pay claims, build desired reserves, cover associated expenses and allow for a safety margin with profit.
At renewal time, the insurer reviews claims paid, estimates inflationary trend and reserve requirements, projects expenses, and determines margins and profits in calculating the next year’s premium levels. In most situations if an insurer incurs a loss, that carrier passes that loss on to the employer through a premium increase upon renewal. Therefore, the argument can be made that even with conventional insurance you are self-insured to the extent that you eventually pay for your group’s own losses.
Self-funding is a method by which an employer can pay for health insurance claims for employees and design the benefit levels, while maintaining control of a reserve account. He eliminates the high cost of a fixed premium normally paid to an insurance carrier and hires a Third Party Administrator (TPA) to administer the medical claims as they occur. The employer can provide these services at a cost far less than an insurance company because expenses are far less. The third Party Administrator can also procure “Excess Risk” or “Stop-Loss” insurance to eliminate the large unforeseeable individual “catastrophic” claim as well as protection for a large total volume of claims of the entire group.
Why Self–Funding?
Self-funding enables the employer to become involved in the payment and administration of the program through the TPA. Further, self-funding allows better management of medical program costs by providing cash flow improvements, therefore using a greater part of every health care dollar to pay claims. Involvement by the employer creates an attitude, which has a favorable impact on utilization, flow, and administrative aspects of the plan.
Fixed costs of a self-funded plan are far less than a fully insured arrangement. Typically, fixed costs are reduced by two thirds. This savings can then be utilized to pay claims. If claims experience is favorable, the employer receives the benefit of retaining all monies not used. Should claim experience be unfavorable, the employer is protected through the purchase of excess risk insurance.
Tags: Self Funding
