Self-Insured vs Fully Insured: Which Health Plan is Right for Your Business?

June 17, 2019 Kellee Lemcke

Overview

Healthcare costs and the unpredictability of healthcare claims are top concerns of senior business leaders, especially for smaller, growing organizations that can't absorb the peaks of healthcare cost volatility. As a result, employers are re-evaluating how they sponsor, structure and deliver health benefits. Transformation is not a matter of “if” or even “when,” but “how.”

 

For many employers, this “how” typically includes a shift away from fully insured plans that transfer the risk to an insurance company and toward self-insured plans where they retain the risks of insurance and claims funding. Self-insured health plans are exempt from state insurance mandates and certain requirements of the Affordable Care Act (ACA). This translates to added flexibility, freedom to customize plan features and savings — potentially substantial savings — on premium taxes, ACA fees and other plan costs without affecting employee benefits.

 

Figure 1: Fully Insured vs Self-Insured Health Plans

 

Self-insured plans traditionally have been more popular with larger organizations, but with rising healthcare costs and ACA fees for fully insured plans, self-insured (a.k.a. self-funded) plans are gaining popularity among small and medium-sized businesses. Additionally, the self-insurance marketplace has evolved to better serve all employer sizes. Properly designed, a self-insured plan can help businesses optimize their healthcare costs, ensure better control over premiums and incurred claims, and create an acceptable risk for the employer.

 

But moving to a self-insured plan isn’t a decision to make lightly and understanding the short- and long-term goals you’re aiming for with this approach will be imperative. It’s also important to fully evaluate your claims data, consider your tolerance for risk and explore your self-insured plan options before making the change. The rewards can be substantial, but there are risks worth considering.

 

To help determine whether self-insurance is the right approach for your organization, review the following three advantages of self-insured plans for employers as well as decision points.

 

What is a Self-Insured Health Plan?

A self-insured group health plan is a plan for which the employer assumes the financial risk for providing healthcare benefits to its employees. In practice, self-insured employers pay for each out-of-pocket claim as they occur instead of paying a fixed premium to an insurance carrier, which is known as a fully-insured plan. A self-insured employer will typically set up a special fund to earmark money, consisting of corporate and employee contributions, to pay claims. 
 

1. Optimizing Costs

A self-insured plan can help businesses optimize their healthcare costs. Based upon Aon’s actuarial analysis and our industry expertise, we anticipate that self-insured plans can drive hard-dollar savings for businesses with little or no disruption to employee benefits or cost. 

 

In many cases, moving to self-insurance may generate savings of at least four to six percent for the employer.

 

These savings assumptions are based on the reduction or elimination of premium taxes, ACA fees and health plan costs for risk charges, reserves, profit, and other items. The costs of providing state-mandated benefits might also be avoided through a self-insured solution, further increasing the expected savings for businesses. Even if state-mandated benefits remain in effect, businesses with self-insured medical plans have the flexibility to modify these benefits and gain additional savings.

 

But while self-insured plans offer companies the ability to have more control over costs, they also have a less predictable cost structure due to monthly claim variations. There are a variety of modified risk funding arrangements to help employers manage their claim variances, as well.  Bottom-line, companies should evaluate their risk tolerance before making the switch.

 

What's Your Risk Tolerance?

While self-insured plans can offer substantial savings for employers, there are also risks an employer needs to be aware of. In a self-insured plan, the employer assumes the risk of paying claims, which means the plan is funded by the employer and claims are paid from employer funds. Claim amounts usually fluctuate from month to month, with some claims significantly exceeding the average. Fortunately, employers have options, such as stop-loss insurance, for managing these fluctuations.

Consider how you manage costs for your workers’ compensation benefits. A self-insured health plan works in much the same way. What is your tolerance for that level of risk? Are you happy to write a check monthly? Or are you willing to incur some risk to reduce your overall plan costs? These factors play a large role in deciding whether a self-insured plan is right for your company.


2. Increasing Control 

A self-insured plan also increases a company’s control over its healthcare spending and helps to improve cash flow.

 

Because self-insured employers pay claims as they go, they can take advantage of the typical two-month lag between when a claim is incurred and payment is made to the medical provider, which means more control over your cash flow. You can also eliminate taxes and other fees that are typically part of a fully insured rate, further enhancing your ability to control costs.

 

Stop-loss policies are another way to help employers manage healthcare costs. Traditional self-insured plans use a stop-loss policy to provide financial protection against unexpected large claims, which can address liquidity and volatility concerns. Most stop-loss policies also provide a limit on the employer’s maximum claim exposure each plan year.

 

Have You Conducted a Historical Claims Analysis?

If you’re considering a switch to a self-insured plan, it is critical that you first conduct a historical claim analysis so you fully understand your potential risk and how it would affect your cash flow. This also helps you identify what plan would best fit your employees’ needs.

Employers with fewer than 500 employees can have more claims volatility compared to a company with a larger employee pool. Employers of this size will want to review their historical claims data thoroughly to ensure they are comfortable with the risk they may incur.

Depending on your market, the availability of data could be limited as well, so you may not have access to all the data needed to make a fully informed decision.

Aon can help you access the data you need, review your claims and conduct a historical analysis to determine what your typical claims look like and what large claims you have incurred. We’ll create a model that outlines your options to manage claim fluctuations and determine whether you have the cash flow to support a self-insured plan.


3. Providing More Flexibility

One of the most favorable advantages of switching to a self-insured plan is flexibility. This can be particularly important for employers that otherwise may have to take off-the-shelf plan designs that don’t fully match their needs or the needs of their employees. Self-insured plans can give you the flexibility to craft a plan to best fit your employee population.

By customizing a self-insured plan, you can choose the deductible and co-insurance levels best suited for your organization.

A self-insured plan also offers the option of eliminating state mandates that you don’t need or that don’t fit your employee population. By unbundling your plan, you can choose a best-in-class pharmacy vendor and a best-in-class medical plan administrator to create an ecosystem specifically tailored to meet the needs of your employees.

 

Conclusion

Rising healthcare costs for employers and employees are driving companies to identify and evaluate all options to reduce costs and give employers greater control and flexibility. 

 

There is a real opportunity for employers with 100 to 500 employees to benefit from the market forces that have shaped self-insured plans, making plans more affordable and a better fit for employers of this size. Before you make a move, however, it is critical that you fully evaluate your claims data and your tolerance for risk so you don't incur volatility beyond what you can manage.

Working with a partner like Aon, with deep experience and expertise in self-funding, is a key part of creating a successful self-insured plan that meets your employee population's health needs and manages your overall risk effectively. 

For companies with a good understanding of their claims and their risk tolerance, a self-funded platform can offer multiple benefits to control costs while creating a best-in-class health plan for employees.

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