Self Funding: Risk vs. Reward

Self Funding has been around a while, yet is seldom talked about.

With many firms saving $1000’s each year by adopting a self-funded benefits strategy, it seems strange that this is the case… (More on this later)

Starting with the basics:

In a typical benefits arrangement, a company offers a selection of medical plans to employees. Under this arrangement, the employee can choose to enroll in a “sponsored” plan, and benefit from a discount: The portion of the plan, paid for by the employer.

At this point, the employee (and their families if applicable), are enrolled in a medical plan through a major carrier. Any medical bills are handled by the carrier, from a doctor visit to a hospital stay.

With this said, there’s another option. 

Simply put, a company can choose to bear some of the medical risk of it’s employees by paying employlee claims themselves. This is generally an option most applicable to larger employers, but with the advent of “partial self-funding”, some smaller groups are beginning to cash in.

Here’s an example:

XYZ Company enrolls in a high deductible health plan through a major carrier.

The plan has a 6000 deductible. It’s very cost effective compared to their past plan. This will be the foundation of their benefits package going forward.

XYZ company has offered a $500 deductible plan in the past, but it was beginning to get too costly to continue. Their aim to save money, while still providing their employees with a similar experience to what they’re used to. (Deductible amount, co-pays for doctors visits etc…)

To continue to provide a plan that meets these requirements, XYZ company chooses to “cover the gap” for their employees. This involves the company assuming the responsibility for medical needs ranging between the desired $500 deductible, and the $6000 deductible of the actual medical plan.

This is a great thing, as the employees will continue to experience a $500 deductible, just as before.

Here’s the key: A “Third Party Administrator” must be used to help administrate claims occurring prior to the $6000 deductible… Afterall, the carrier in this case doesn’t pay claims untill the deductible of $6000 has been met.

The Third Pary Administrator, with the help of a broker, will essentially act as the Carrier. All medical bills will be handled by this TPA prior to the $6000 limit. At that point, they will collaborate with the carrier and “pass the torch”.

Ultimately, your employees will feel as if this is one cohesive plan.

The employer, on the other hand, comes out ahead in many instances: These types of arrangements can save significant money compared to “fully insured” plans ESPECIALLY for employers with a healthy and active workforce.

Could Self-Funding be the right choice for you? Give us a ring, or send us an email at: groupbenefits@sciandassociates.com

About the author: Nolan Waterfall
Nolan serves as a consultant, both to SCI, and within his own brokerage, Campfire Health, where he enjoys educating owners, C-level executives, and HR managers, on the in's and out's of all things compliance, technology, and benefits strategy. Nolan loves reading, anything outdoors, and spending time with his wife Joanna.

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