What Does It Mean to Self-Fund Your Health Insurance?

As a business leader, you wear many hats. One of which is ensuring your employees have access to a quality health plan. But navigating the world of health insurance is challenging, and the traditional route of purchasing a fully insured plan from a major insurance carrier may seem like the only viable option.

With a fully insured plan, you pay the insurance company a fixed amount (a premium) every month, and they take care of the bills when your employees go to the doctor or hospital.

However, as health care costs continue to rise, these traditional plans have become increasingly burdensome. Premiums rise year after year, often outpacing the growth in business revenue. It’s impacting both your bottom line and the ability to provide competitive benefits.

The good news is there’s an alternative: Self-Funding.

In a self-funded health insurance plan, instead of paying a fixed premium to an insurance company, you set aside money to pay for your employees' medical expenses yourself. The employer assumes the financial risk of providing health plan benefits to employees. You pay for actual health care claims incurred by employees.

Here’s how it works in simple terms:

Setting Up a Fund: Employers allocate funds to cover expected health care claims of their employees. Think of it like setting up a special savings account just for medical bills. You put money into this account based on what you expect your employees' health care costs will be. This fund is often managed by a third-party administrator (TPA) who handles claims processing and administrative tasks.

Paying Claims: As employees incur medical expenses, the claims are submitted to the TPA. This means that when your employees go to the doctor or hospital, the TPA will use the money from your account to pay their bills directly. The TPA processes these claims and pays providers directly from the allocated fund. You don’t pay an insurance company upfront; you only pay when someone actually needs medical care.

Getting Help with Big Bills: To protect your business from really high medical bills (like if someone needs major surgery), you buy what's called stop-loss insurance. This is like a backup plan that kicks in if medical costs go above a certain amount, ensuring that one big claim doesn't drain your health fund.

The Benefits of Self-Funding

Cost Savings: With self-funding, you can save money because you’re only paying for the health care your employees actually use, not for potential care they might need. For instance, one of our clients, a company with about 60 employees, saved over $1.6 million in three years by switching to a self-funded plan instead of accepting a 10% premium increase from UnitedHealthcare year over year. By only paying for actual claims rather than inflated premiums, businesses can reduce their overall health care costs.

Flexibility: You have more control over the benefits you offer when you self-fund. You can design a health plan that better suits your employees’ needs rather than picking from the off-the-shelf options provided by an insurance company.

Transparency: When you self-fund, you get a clearer picture of where your health care dollars are going. This transparency helps you understand and manage your health care expenses better. You can identify cost drivers and inefficiencies and implement strategies to mitigate them.

Cash Flow Management: Unlike fully insured plans where you pay premiums upfront, self-funding allows employers to keep and invest their funds until you need to pay for medical claims.

The Bottom Line

Self-funding isn’t a quick fix; it's a strategic move that has the potential to pay off significantly over time. It also isn’t for every business, but it’s something worth exploring.

By considering self-funding, you can take more control of your costs and create a health plan that truly fits the needs of your business and employees.