Self-funding

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Self-funded Insurance

Sponsoring a health plan is important to the success of any business. It nurtures company culture, attracts high talent, and keeps employees loyal. However, it is usually one of the most expensive components of business operation. Rising costs, uncertain legislation, and an increase in health care utilization lead to many questions about how to design and finance the best health care plan.

Insurance is basically a risk transfer device. Organizations providing health care benefits to employees have two main options to choose from: self-insured plans and fully-insured plans. The main difference between the two choices is who owns the risk.

Frequently Asked Questions

What is self-funding, and how does it work?

Self-funding is an alternative method of paying for your company’s health insurance. The easiest way to understand it is to compare it to the more traditional fully insured program. Insurance is all about the sharing of risk. When you buy regular insurance, you pay a set premium to the insurance company. The premium you pay is based on a process called underwriting. The insurer considers the health information of your employees, the size of your company, and past claims experience, to come up with a premium that they calculate will cover the cost of your anticipated claims and still provide them a healthy profit. Under a self-funded model, instead of paying a set premium to an insurance carrier, your organization pays claims as they are incurred by your employees. With most self-funded health plans, particularly with small to mid-size employer groups, the company also purchases stop loss insurance to limit their risk exposure.
How are claims paid in a self-funded program?

Once everything is in place, your self-funded plan works almost exactly like a regular insurance plan. Your organization pays a set amount for each employee into a special account that is maintained either by you or by the Third Party Administrator (TPA) that administers your plan. When your covered members see a physician, go to the hospital, or have a prescription filled, a claim is sent to the TPA, who pays it with a check drawn on the account into which the funds were deposited. The TPA also issues checks from this account to cover the administrative and overhead costs of the Plan, including the monthly premium for your Stop Loss Insurance, if applicable.
Why choose self-funded insurance over fully-insured?

There are two primary advantages to self-funding. The first is that, in general, your costs are much lower. The typical health insurance company expects to apply about 30% of your insurance dollar towards “overhead” expenses, including administrative costs, re-insurance (insurance bought by the insurance company to cover the possibility of extraordinarily high claims), general reserves, and profit. Under self-funded plans, on the other hand, the overhead expense is usually 20% or less of the total dollars. This cost savings, which may be considerable, goes directly to your organization’s bottom line. The second advantage is that you have much more direct control over the benefit structure and other aspects of your health plan. With traditional insurance, you can only choose among the range of plans that the insurance company offers; you cannot usually customize benefits within a given plan that you have chosen; and you don’t get much insight into your population’s utilization. When you self-fund, you receive as much or as little information during the plan year as you choose. There are a wide range of reports available that show how covered members are utilizing your plan, which can help fine-tune your plan along the way to get the most from your health care dollars.
What are PPO networks, and how do they affect the costs of the plan?

A PPO network is a group of medical providers, such as hospitals and doctors, that are grouped together to create a network of participating providers. These Preferred Provider Organizations (PPOs), along with their members, have agreed to accept pre-negotiated, reduced fees for most of the services they provide. Novo Benefits works with a range of provider networks nationwide to make it possible for you to buy your health care at a reduced cost. You pay less if you use providers that belong to the plan’s network. These savings translate into lower costs to your plan, and reduced out of pocket expenses to your members.
What are the risks with self-funding verses typical plans?

The biggest single risk to any organization with a self-funded plan is that the health plan’s expenditures could end up higher than anticipated when you established your basic funding level. There are two types of insurance you can purchase to limit risk to your plan, Specific and Aggregate. Purchasing specific and aggregate insurance provides peace of mind and lets you sleep at night knowing in the event catastrophe strikes, your plan is covered. Our team of experts will guide you through the process of risk evaluation and budgeting to ensure you are prepared and have the funds to cover the cost of your benefit plan.
I like my current broker. Can you work with them?

Yes. Novo Benefits partners with local brokers to bring the best solutions to the mid-market. Our wholesale arrangements and proprietary contracts enable us to offer mid-market employers better benefits that are typically only available to Fortune 500 companies.
How flexible is a self-funded plan?

With a self-funded approach, the employer has greater freedom to build a benefits program that fits its unique needs. You’re not restricted to the programs offered by insurance carriers, but rather can choose your own cost and utilization controls, service providers and networks, and health plan designs. Self-insured plans also benefit from the governance of ERISA, which pre-empts state insurance laws and thus allows uniformity in benefit offerings for multi-state employers.
How much insight does a self-funded plan provide?

Self-funding typically offers the employer access to data that provides insight into the status of the health plan. You can track key indicators such as total charges, payments, and provider utilization. Powerful data analytics tools can maximize the effectiveness of your data, allowing you to delve into the details to understand health plan trends and determine what is driving your costs. Novo Benefits uses a data analytics tool that provides a 360 degree view of an employer's population. This comprehensive, cutting-edge tool allows you to isolate key cost drivers and trends, forecast future spend before it's too late to engage, view complete population of employees, spouses, and dependents, and stay connected with real-time alerts on your population.
What size and profile of a company works best for self-funding?

The ideal size for a company to self-fund is 75 or more employees. However, we have many smaller client companies who have maintained successful self-funded plans for several years. Whether you have 50 employees or 10,000 Novo Benefits can build a custom plan that is right for you.

Self-funding 101

In a traditional, fully insured healthcare model, employers pay a premium to an insurance carrier to provide benefits to workers. Premium rates are based on the claims history, pooled risk, and the number of employees enrolled in the plan. Premiums are billed monthly and are typically fixed for a year.

In this version of healthcare coverage, the insurance carrier collects monthly premiums and pays health care claims on behalf of the company based on the benefits outlined in the plan document. Essentially, employers are prepaying insurance companies in this model and often at higher prices than market value since the carrier is at risk if claims costs exceed their expected level. It is not uncommon for insurers to set premiums at levels that include projected healthcare costs rather than current day rates.

In a self-insured model, the employer, not the carrier, is responsible for the claims. A self-funded employer pays claims as they are incurred. A Third Party Administrator (TPA) or Administrative Services Only (ASO) administers the plan. To protect the company’s finances, the employer can purchase stop loss insurance to limit the risk of catastrophic claims or over utilization. Under this structure, employers hold on to the money they would be sending to an insurance company for monthly premiums and instead pay claims directly as they are incurred by their employees. This structure enables companies to have more control over their data, benefits, and cash flow.

Companies that opt for self-funding are essentially interested in having more control over their benefit plans and want to engage at a deeper level to reduce costs and care for employees. However, every employer has a different comfort level when it comes to control, pricing, creativity, flexibility, and risk tolerance. There is a wide array of options for funding a health plan and managing risk.