Educating, Equipping and Empowering Small and Mid-Size Companies to Save
As insurance premiums skyrocket, more small and mid-sized companies are increasingly looking to contain spiraling employee health bills by adopting a self-funded insured model.
A self-funded, or self-insured plan, is one in which the employer assumes the financial risk for providing healthcare benefits to its employees. In practical terms, self-insured employers pay for claims out-of-pocket as they are presented instead of paying a pre-determined premium to an insurance carrier for a fully insured plan.
Self-funding is one of the most effective ways employers can control the rising costs of healthcare coverage. In understanding self-funding as a concept and how it differs from fully insured products, below are a few advantages and disadvantages of self-funding.
Potential advantages of self-funding:
- Freedom to design the benefit plan and freedom from state imposed mandated benefits
- Premium taxes are eliminated reducing overall plan costs
- Improved cash flow. While fully insured premiums are due in advance, self-funded plans pay claims as they are received and processed after the claims are incurred. There is generally a lag of 60-90 days between the time a claim is incurred and the time a claim is paid.
- The reserves remain with the employer. If the reserve described above due to claims lag is held by the employer in general assets, the result is cash flow savings to the group equal to the company's return on two or three months of claims.
Potential disadvantages of self-funding:
- Increased liability. The employer will have additional responsibility both as to claims and overall administration and regulation of the plan.
- Uneven cash flow. The amount of claims paid in any one month may fluctuate significantly from the prior month.
- Terminal liability in the event an employer chooses to move back to fully insured. Because the reserves are vested in the hands of the group, the group has the liability of "run out" claims. Run out claims are those incurred but not yet reported.
Self-funded plans are governed by the Employer Retirement Income Security Act (ERISA) and are appealing to employers because of the greater level of flexibility that comes with being able to tailor the plan to their needs with fewer state-mandated features. While firms take on additional financial risk, they are able to limit their total risk through the purchase of a stop-loss policy and benefit from the increased cost savings typical of the self-funded model.
Many employers, particularly those with more than 300 employees, will find the advantages of self-funding outweigh the disadvantages. Each group and situation is unique—a comprehensive evaluation including a financial comparison will provide the employer with the information to determine if self-funding is appropriate.
The Role of the PPO Network in a Self-Funding Arrangement
Most employers "lease" a PPO Network - such as the Arizona Foundation - for their employees, depending on benefit structure. This often saves out-of-pocket expense for the employee and reduces risk to the employer by allowing them to take advantage of established PPO contracts with physicians and hospitals.
Features of a good PPO network include:
- Robust and easily accessible
- Strong relationships with providers
- Discount structure & payment timeline
- TPA Integration
- Reliable reporting
- Adequate and fair discount structure
- Recognized by the top stop loss carriers
The Arizona Foundation's Network offers the flexibility to choose physicians from within or outside of the organization's network. If you use the providers and hospitals listed in the Foundation Provider Directory, you receive a richer benefit.
Arizona Foundation's PPO and POS Network Plans are an excellent coverage choice because they offer a wide selection of hospitals and doctors. Competing on the size of the medical network has always been important and will continue to be. We take it a step further by identifying high quality providers; knowing who the better providers are and having the knowledge and tools to get employees there when they need care leads to better health outcomes and lower costs over the long run.
Many small and medium size companies are switching to a self-funded arrangement because it saves money, allows them to create customized plans, and it just makes sense! For more information on how the Arizona Foundation can help you save money on your employee benefits, and to see if self funding is right for you, call us today at 800-624-4277 or e-mail.