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More small companies discovering advantages of self-funding health coverage

Wednesday, June 19th, 2019

Ad Boyle, Director of Employee Benefits

By: Ad Boyle

Self-insurance used to be a strategy used only by large companies, as a way of lowering the cost of providing health benefits to their employees by taking on more of the risk.

That has changed. Today, more and more small and medium-sized companies have been choosing the self-funded route.

At the start of this century, the percentage of all employees under self-insured plans topped 50 percent for the first time. By 2015, 63 percent of all employers and 83 percent of those with more than 200 employees were self-insured. This trend has been even more pronounced in the Southeast, with the number higher than 90 percent in South Carolina, North Carolina, Georgia and Maryland.

The numbers have gone up especially among smaller employers.

A lot of this trend is due to the Affordable Care Act, which caused many employers to anticipate unsustainable annual cost increases in their medical plans.

What is different about self-funded insurance?

The traditional approach was the fully insured plan, in which employers paid a predetermined premium to an insurance company to cover the annual cost of care for all plan members. That premium was based on the number of employees, and the employer was not reimbursed if claims costs turned out to be lower than the premium.

The self-funded approach is based more in what happens in real life. Under a self-funded plan, employers pay only for claims incurred. They estimate assumed risk based on claims history and health data and protect against unexpected increases in claims with reinsurance, or stop-loss, coverage.

This gives employers greater control. They can influence their cost through detailed health data and custom clinical outreach programs. In other words, they can take action to make their employees healthier, rather than blindly paying set premiums no matter what.

While self-funding means taking on more risk rather than leaving it to a traditional insurer, company leadership has greater control over how that risk is funded. Claims are paid as they actually occur, and the impact on cash flow can be significant.

Self-funded companies also face less governmental regulation. They have greater freedom to address the actual needs of their employees, rather than focusing on a regulatory mandate.

Self-funding isn’t for every employer, however. The company should have enough capital on hand to take on the risk of paying employees’ health care claims. Also, employers with high turnover are not good candidates because employees don’t stick around long enough to get healthier through the employers’ wellness initiatives.

The insurance experts at South Risk Management stand ready to help you determine whether self-funding is right for you, and to help you get started if you choose to pursue that course. Call us at 803-733-5284 to learn more.