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A growing number of U.S. employers are making the switch to self-insuring as a way to reduce costs and improve service. Self-insuring or self-funding is not right for every organization. Employers considering a switch from fully funded to self-funded health plans should analyze the advantages and disadvantages before making the switch. This article describes self insured plans, including the pros and cons of such plans, and helps you decide if self-insurance is the right choice for your firm’s health care benefits.
According to the Self-Insurance Institute of America, Inc., “a self insured group health plan (or a self-funded plan as it is also called) is one in which the employer assumes the financial risk for providing health care benefits to its employees. In practical terms, self insured employers pay for each out-of-pocket as they are incurred instead of paying a fixed premium to an insurance carrier, which is known as a fully insured plan. Typically, a self insured employer will set up a special trust fund to earmark money (corporate and employee contributions) to pay incurred claims.” Employers can be partially or fully self insured. Employers that choose to partially self-fund, may decide, for example, to continue third-party coverage of mental health or prescription benefits, but self-fund all other medical claims.
Self-insured group health plans are governed by a variety of federal laws including, but not limited to: ERISA, HIPAA, COBRA, the U.S. tax code and federal anti-discrimination laws such as the ADA.
The primary reasons employers cite for self-insuring are:
The primary disadvantage of self-insurance is the assumption of greater risk. A year that brings large unexpected medical claims requires that the company has the financial resources to meet its obligations. This unpredictability puts greater demands on budgeting and cash flow. Budgeting is more difficult because health care expenses will vary from year to year, whereas with a fully insured plan, employers know how much they will pay in premiums in a given year
Self-insured plans also require strong administrative skills. Self-insured employers can either administer claims in-house or subcontract the administrative obligations to a TPA. TPAs can help employers set up their self insured group health plans and coordinate stop-loss coverage, provider network contracts and utilization review services. Some of the additional administrative duties associated with selfinsurance may include monitoring the plan, determining premium rate equivalents for budgeting purposes, administering employee contributions, filing annual reports and day-to-day administration of the plan, establishing a trust to fund the group insurance plan and setting up cash reserves to offset claim run-out liability.
Ultimately, if you want to operate a self-funded health plan, it should be considered in light of your company’s cash flow, risk tolerance, employee numbers and preferred budgeting methods.
Contact ThinkTank Insurance Partners for more information about coverage options.
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