Is it Better to Self Fund Employee Health Benefits?
Employee health bills are fluctuating because of uncertainty related to the 2010 healthcare reform bill. Companies are trying to contain the damage by paying employee health claims out of pocket. Joseph Berardo, Jr., CEO of MagnaCare, said that the total savings from doing this could be between 10% and 20%. MagnaCare administers self-funded health insurance plans to municipalities and businesses in New Jersey and New York. When employers debate whether to adopt a self-funding plan, the possibility of lower monthly healthcare costs should be considered in comparison with the risk of covering employees' healthcare bills. There is no concrete answer to this issue that is right for all situations. The best answer depends on the demographics of the employee bases and the company's financial situation. The risk of an employee having an accident or developing a serious illness is a major concern.
Although nearly 93% of companies with more than 5,000 workers have self-funded plans, many smaller companies don't. According to a recent survey conducted by Kaiser Family Foundation, the reason for reluctance among smaller companies is the possibility of being hit with a large employee healthcare bill and not having enough cash to pay it. The survey found that only 16% of companies with under 200 workers had self-funded plans. However, experts in this industry expect interest in these plans to rise in the future.
The Benefits Of Self-Funded Plans
From the data gathered, it's clear that there are some benefits to self-funded plans. However, there are more benefits than those that are apparent on the surface.
- Quality of Data Employers have better access to health claims of employees. In addition to this, they also have more information about their employees' demographic information. Exposure is limited only to employees instead of a broad population. This is a major benefit over regular health plans, which only offer generalized information.
- Customized Plans Employers decide what is covered in the plan. This includes benefits, exclusions and eligibility provisions. Employee cost sharing, retiree benefits and policy limits are also decided by the employer. With exemption from state rules, employers are able to decide on specific provisions without state considerations.
- Control of Cash Since coverage isn't prepaid, employers have access to interest and cash income that wouldn't be available under regular insurance policies. Self-funded plans may also delay payment of health plan fees until the services have been charged. However, if claims are lower, the employer is able to retain the savings instead of allowing the insurer to keep that money. Another benefit is that self-funded companies are not under obligation to pay state health insurance premium taxes.
- Lower Employee Premiums Workers will enjoy lower premiums for both single and family plans. In addition to this, they also pay less upfront when they're enrolled in complete or partial self-funded plans than they would at a company that is fully insured.
- ERISA Laws Replace State Regulations
This federal law exempts self-funded plans from the state's regulations. This includes reserve requirements, insurance laws, premium taxes, mandated benefits and consumer protection regulations. Employers must still abide by rules from the following entities:
- U.S. Tax Code
- Health Insurance Portability & Accountability Act
- Newborns' & Mothers' Health Protection Act
- Pregnancy Discrimination Act
- Mental Health Parity Act
- Women's Health & Cancer Rights Act
The Cons of Self-Funded Employee Plans
Although there are many benefits to enjoy by implementing self-funded plans, there are also potential downfalls. It's important to consider these.
- Financial Risk With fewer employees than a larger company, there is a higher statistical risk of costly claims for illnesses or accidents. Most employers with self-insured plans purchase stop-loss coverage in order to get a reimbursement for claims totaling amounts over a specific dollar level. In a description posted by the Self-Insurance Institute of America, stop-loss coverage is insurance that indemnifies a plan sponsor from claim frequency or severity that is abnormal. Companies such as Zurich, Gerber Life and Arch Insurance, which are all considered large companies, provide this type of coverage.
- Administrative Risks The Department of Labor has researched how self-funded employers fail to implement efficient administrative systems. Failure to correctly administer a plan is considered a breach of fiduciary duty. Employers take full legal responsibility for operating the plan, so it's important to realize just how crucial this responsibility is. In addition to worrying about this, there are also strict rules for private claims information. Since employers have access to such information, they must take further measures to protect it and keep it secure. In some cases, this may require hiring one or more security workers.
- Administrative Costs Self-insured claims can be administered within the company or handled by a subcontracted party, which is commonly called a TPA. These administrators assist employers in setting up self-insured group plans. They also coordinate stop-loss coverage, utilization review services and provider network contracts. However, there are extra costs for these services.
- Economic Weakness
It may be necessary to keep a self-funded plan for a minimum of three to five years in order to fully enjoy the benefits. This may be extremely difficult for some companies during economic hardship.
Be sure to weigh the benefits and disadvantages of self-funded plans before making any changes. If the task of determining how profitable such a change would be is too difficult, consider hiring the services of a professional analyst.