Why Self-Funded Health Insurance Should be a Priority for Employers
Insurance costs are predicted to rise steadily in 2020. Could self-funded health insurance help employers save costs while prioritizing employee well-being? In this article, we look at:
- How self-funded health insurance works
- Five benefits of this model
- Why self-funding is a good fit for data-driven HR
It’s no secret that healthcare and health insurance is getting more expensive with time, impacting both costs to the company as well as an employee’s out-of-pocket expenses. A report by the National Business Group on Health predicts that insurance costs will go up by 5% in 2020, hitting a national average of $15,375.
To mitigate this challenge, employers are now switching to innovative benefits like self-funded health insurance. It allows companies to design a bespoke plan, negotiate premium rates, and effectively manage benefits administration.
Let’s see how self-funded health insurance works and how it could benefit your company.
Learn More: 3 Ways Technology Can Help Reduce Healthcare Costs
How Does Self-Funded Health Insurance Work?
Traditionally, an employer would partner with a large insurance carrier to cover its employees and their dependents. This model is known as fully funded insurance.
In contrast, with a self-funded health insurance plan, the company analyzes its healthcare needs and designs a package in sync with employee health requirements. It then collects insurance premiums and processes employee claims directly without intervention from a carrier. In most cases, the company works with a third-party administrator to take care of the paperwork and calculate interest on the premiums collected. While smaller companies may be unsure of self-funding their health insurance provisions for employees, companies with employees above 500 make a good fit for this benefit.
Self-funded health insurance is commonly used by larger companies. This is because they have a large workforce and can absorb the risk/unpredictable costs that could arise. With the right strategy, even smaller employers can provide (and benefit from) self-funded health insurance.
This is critical as healthcare costs continue to rise in 2020 and beyond.
Learn More: How Does Medicare Work With Employer Coverage
5 Reasons You Should Switch to Self-Funded Health Insurance
On the surface, self-funded health insurance could appear complex and challenging to manage. As a result, when it is time for insurance plan renewal, companies often choose to stay on with their existing carrier and stomach whatever increase in premiums they mandate.
But let’s say your carrier drives premiums up by 5% after a fiscal year, and your workforce has received only a 2% appraisal. This means that they will lose out on valuable compensation. Self-funded insurance plans can curb this. Here are its key benefits:
1. You can tailor the healthcare package as per your workforce composition
This is particularly helpful for small-to-mid-sized companies that employ workers from a specific demographic.
For instance, a company in a city with a sizable veteran population will inevitably face a specific kind of healthcare requirement frequently. Self-funded health insurance lets you prioritize certain types of healthcare and route investments accordingly. This offers you greater flexibility to design plans that actually work for employees.
2. You enjoy significant tax benefits
The Affordable Healthcare Act (ACA) has predetermined rules for taxation on insurance premiums. Premiums collected by traditional, fully funded carriers are subject to this amount, adding to the costs employees and employers incur.
Interestingly, self-funded health insurance is exempt from this taxation at the federal level. Depending on your workforce size and healthcare needs, you could significantly save taxes year-on-year.
3. You can access interests in case of low utilization
In a self-funded health insurance model, the employer is responsible for collecting, storing, and managing the premium amount. During years when the utilization level is low (i.e., there is a lower-than-average number of claims), the premium can generate an impressive interest value.
A third-party administrator will help you manage these resources efficiently so you can both create wealth and address employee needs promptly.
4. You will revisit your insurance plan every year
One of the biggest challenges of fully-funded insurance is its propensity for a set-and-forget approach. Employers continue with the same plan for years due to negotiation complexities, even if internal requirements change.
In the self-funded model, the package design and premium amount are realigned after every fiscal year, according to emerging needs and workforce trends. This ensures superior plan agility.
5. You avoid insurance carrier lock-in
For companies working with the same carrier for decades, it might be tough to negotiate a lower price or switch carriers. This adds to the burden on employees, compelling them to forego an increasingly large portion of their compensation due to carrier lock-in.
Self-funded health insurance implies that you have greater visibility and control, even if you partner with a third-party administrator, and can alter plans at your discretion.
Learn More: Modifying Your Wellness Program for the Digital Age
Self-Funded Health Insurance Makes Perfect Sense for Data-Driven Companies
Over time, employee healthcare data can reveal opportunities for insurance plan redesign and self-funding.
For example, LinkedIn found that employees regularly choose expensive emergency room treatments for common accidents/ailments because they are unaware of other options. It set up a self-funded on-site clinic to address this. The benefits were immense, especially for employees from outside the Bay area or the U.S., who were unfamiliar with the region’s healthcare facilities.
Similarly, HubSpot now offers a self-funded health insurance plan for dental care, in-sync with the company’s culture and employee experience objectives.
Self-funded health insurance comes with a lot of benefits, even if there’s always a possibility of one employee(s) exceeding your premium margins. By partnering with the right strategic vendor and/or third-party administrator, companies can leverage existing employee data repositories to negotiate a best-fit package.
At a time when healthcare costs are on the rise, and employee benefits are a differentiating factor for top talent looking for jobs, innovative insurance models like self-funding can set employers apart. This will help to create a safe, productive work environment that adds to your bottom line while looking after employee well-being.
Have you considered switching to self-funded health insurance? Tell us on Facebook, LinkedIn, or Twitter. We’d love to know more about your strategy!