When St. Norbert College in De Pere, Wis., faced a large cost increase on its health plan several years ago, they switched to a self-funded plan. In other words, they opted to pay some of the healthcare costs of its plan participants directly, rather than transferring that risk to an insurance company through a fully insured plan.
Health plan costs did not drop right away and many of the same challenges remained. For a while, the college’s health plan was in a continual state of under-funding. Under-funding is when the organization is spending more on claims than the budget they had set aside to pay for the claims.
In time, with innovative ideas in plan design and employees engaging in wellness efforts, the strategies paid off. St. Norbert improved from being under-funded to realizing positive reserve balances month-to-month and then year-to-year. St. Norbert has managed health plan costs and has not increased employee contributions in eight years.
Essentially, the employer enters the health insurance business. But this is not necessarily as complicated as it sounds:
There is also flexibility and control that comes with a self-funded plan. The employer can customize the plan to meet the specific healthcare needs of its workforce, as opposed to purchasing a "one-size-fits-all" insurance policy. Self-funded employers benefit from flexibility in plan design and plan attributes, such as wellness and disease management programs.
Traditionally, large companies generally above 100 lives that have stable employee populations, positive cash flow and stronger-than-normal risk tolerance are able to capitalize on all the advantages that a traditional self-funded plan can offer.
With that said, the marketplace is trying to be more reactive to the new demands placed on a wider range of companies even down below 50 lives by evolving self-funded products to meet their needs.
According to Kaiser Family Foundation, 15% of covered employees working for firms with fewer than 200 employees were covered by self-funded plans in 2013, up from 10% in 2004. Demand for self-insurance is so strong that UnitedHealthcare began offering the option to companies with as few as 10 employees in 2014. The previous cut-off was 100 employees.
What is creating this interest in self funding? Many signs point to the Affordable Care Act (ACA). A recent healthcare reform update in the journal Modern Healthcare displays this headline: “Businesses seeing self-funded plans as way to dodge the ACA.”
It’s important to recognize that self-funded plans do not avoid all or even a majority of the mandates under healthcare reform — most of the requirements of healthcare reform apply equally to both self-funded and fully-insured plans.
However, there are some important parts of the law that self-funded plans can avoid, for example:
The concept of self funding is based on a five-year approach. Evaluating a self-funded plan after one year would be short-sighted. The idea is to build a claims reserve over time to pay claims out of employer assets, rather than paying flat, monthly premiums to an insurance company regardless of how claims are presented. Health plan claims experience tends to run in cycles. Generally, two out of every five years can show a poor claims experience. It is for those years that a well-accumulated claims reserve will be valuable to an employer group.
Since a self-funded employer assumes the risk for paying the healthcare claim costs for its employees, it must have the financial resources (cash flow) to meet this obligation, which can be unpredictable. Small employers and other employers with poor cash flow may find that self-insurance is not a viable option.
There are many strategies and considerations when implementing a self-funded plan. There are advantages and potential disadvantages. You should fully understand self funding and work with an expert before moving forward.
For more information, contact us.
David works with our clients and consultants on a wide range of HR compliance and strategic issues with a particular focus on healthcare reform. He has previously practiced law in private practice and worked in the Minnesota court system. David has a law degree, magna cum laude, from the University
David works with our clients and consultants on a wide range of HR compliance and strategic issues with a particular focus on healthcare reform. He has previously practiced law in private practice and worked in the Minnesota court system. David has a law degree, magna cum laude, from the University of Minnesota, received his undergrad from Gustavus Adolphus College and is a member of the Society of Human Resources Managers (SHRM).
Like Wrightstown Community School District Superintendent Carla Buboltz, many civic leaders — as well as business owners and executives — are seeing their job descriptions evolve. Healthcare reform, along with escalating health insurance costs, are demanding more of their attention than ever before. A survey by the U.S. Chamber of Commerce says the effects of the Affordable Care Act (ACA) are now the top concern for organizations, edging out general uncertainty about the U.S. economy.
When the public exchanges opened in October 2013, the technical glitches and low enrollment were well publicized. Since then, both public and private exchanges have evolved significantly. The private alternatives that have entered the scene often have more advantages than their public counterparts.
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