Advantages & Disadvantages of Self-Funded Insurance Plans

by | Aug 25, 2022 | Healthcare

Employers are increasingly considering self-funding to save on medical costs. Self-funding can help employers spend money in a more cost-effective way and serve their population with specific benefits their employees will actually use.  The cost of health insurance is the second largest expense behind payroll for most employers. Healthcare costs are currently outpacing regular inflation while prescription costs are increasing threefold. Basic health plan design changes no longer have the impact they once had to reduce premiums, as premiums continue to rise in a way that is unsustainable.

Employers are increasingly considering alternative funding to control this growing expense — particularly self-funding, as it can help them spend their money in a cost-effective way. So, is self-funding the solution? First, let’s look at the myths about self-funding and examine its advantages and disadvantages.

Myths of self-funding                                                                                                                                                   

Self-funding, especially for smaller organizations, is more common than most employers think. In 2020, 23% of employers with 2 to 199 plan participants were self-funded according to Kaiser Family Foundation.2 From 100 – 199 plan participants, the percentage of employers that were self-funded grew significantly and from 200 – 1,000 participants, nearly 60% of employers were self-funded.2

Many smaller organizations with fewer than 200 employees believe they can’t self-fund because they don’t have a large enough group however if you have at least 100 participants you can make educated decisions around funding and can have more opportunities for savings. Many employers also worry that self-funding means taking on too much risk. A plan designed correctly with individual and aggregate stop-loss insurance protects your organization from catastrophic claims and unanticipated high utilization. For many midsize employers, the reward is worth the calculated risk.1

Benefits of self-funding

A customizable plan design: In this marketplace, to recruit and retain talent you must offer competitive and customizable benefits that serve every aspect of their lives. Self-funded plans allow you to customize your plan to meet the your specific workforce needs.

ERISA exemptionAnother benefit of self-funding is ERISA exemption from state-mandated benefits. Self-funded employers choose their own benefits offering rather than having benefits imposed by state mandates and insurance carriers.1

Access claims reporting: Self-funding provides employers with access to detailed claims reporting, allowing for greater clarity on what is driving benefits costs. By evaluating claims and member needs, you can decide which benefits to provide, invest more in or remove.

Control over health plan costs: When an employer self-funds, they eliminate charges from their insurance carrier for overhead, reserves, various risk and retention charges, profit margins and taxes. As a self-funded employer, you only pay for members’ actual claims rather than a projected claims cost.

Disadvantages of self-funding

First, employers claim fiduciary and compliance responsibility. But more than that, becoming self-funded requires sufficient cash flow; the employer must be able to handle potential volatility. Self-funding also requires additional responsibility for banking arrangements, and there could be greater frequency on the funding of claims.1Additionally, claims are statistically unpredictable for smaller or more volatile groups.

How to determine the right solution for you

Regardless of the funding arrangement, it is important to recognize that there is no one plan or method that will work for every employer – every time. Some considerations should include geographic location, plan design, financial situation and previous claims experience.