Small Businesses & Self-Funding Medical Benefits

ACA “Pooled” Rates vs. Self-Funded Strategies

There is a lot of talk about self-funded or level-level funded medical plans as a way for companies to save money on health benefits… for good reason.

The Affordable Care Act mandates uniform “pooled” rates for all employers with less than 50 employees.  As such, employers are “stuck” in the rating pool with all other small businesses. Self-funding is a way for companies with healthier than average employees to “break out” of the pooled rates set under the ACA. In self-funded strategies, built-in underlying insurance called “stop-loss” protects even small businesses from a potentially catastrophic cost of a large medical claim.

For companies with less than 50 employees to qualify, employees will have to complete health questionnaires or phone interviews.  Some insurance carriers are also using “prescription drug underwriting” to screen businesses for lower rates. This involves scanning prescription databases for what medications employees are taking- this connects to the underlying medical conditions and the cost of the drugs.

Pros and Cons of Self-Funding

It is possible for employers to save 20% or more of health plan costs with self-funding.  But what are some of the advantages and potential pitfalls of self-funding?

• Self-funded contracts give companies an opportunity to retain funds and enjoy cash-flow advantages.  Any unspent claim dollars are retained by the company, so only funds needed to pay claims for the specific company are ever spent.
• Although there is stop-loss insurance in place, typically, the total plan cost can be 20% to 25% more than fully-insured if the claims level is significantly higher than projected.
• Only employers with proof of better than average claims expense should consider self-funding.
• There can be a higher risk of liability since the employer is technically the insurer of the plan and not an insurance company.
• Employers with under about 300 employees should seek out a “level-funded” contract, where monthly claim reimbursement levels from employer funds are capped at the level of a fully-insured plan. This protects the company from claim volatility.
• Employers need to work with a broker or consultant who has experience with setting up and working with TPAs and stop-loss carriers.  Also, there are compliance and cost issues that require the help of an experienced professional in self-funding.

Self-funding is an attractive alternative to fully-insured health plans for many companies.  Self-funded plans are now available to employers with as few as 10 employees. With proper stop-loss insurance levels, and an experienced professional to guide the way, more companies than ever can save money by considering self-funded medical plans.

Have questions? Let’s talk! Contact our health and benefits trusted advisors at 757-422-6729.

Written by Gregg Kennerly, AVP of Health & Benefits.