Main Objectives of Self-Funding
These are the major objectives of a self-funding program:
- Flexibility of plan design
- Flexibility of funding
- Elimination or reduction of premium taxes
- Elimination of excess margin and profit of insurance companies
- Elimination of insurance company deficit recapture
- Reduced administrative costs
- Improved administrative services
- Improved employee morale because of personalized and timely administration
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The Concept of Self Funding
Although insuring through the method of self-funding can be construed as being too risky, a properly designed program can contain more risk protection than traditional insurance programs. At the same time, a well-designed self-funding program affords increased flexibility in plan design and administration, and improves claims service to employees.
As more and more employers understand this funding method, many leave the days of paying high insurance premiums behind. Today, they find themselves saving hundreds of thousands of dollars in premiums, while achieving much greater control over this incredibly large expense.
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Third-Party Administration
In assuming the responsibility of paying for its employees’ health claims, most employers are not equipped to take on the day-to-day operations formerly performed by their insurance carriers, such as:
- Plan documentation
- Reporting
- Designing stop-loss insurance coverage
- Processing claims
- Compliance with laws
- Managing claims
- Writing checks
- Supporting employees
- Reporting plan status
In most cases the employer contracts with a professional third-party administrator (TPA) to perform these duties on its behalf.
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Stop-Loss Insurance
Under a self-funded plan, employee health claims are paid directly by the employer or through a trust. However, the employer or trust is subject to the risk of large individual claims, or a high incidence of claims on the whole group in aggregate. Proper design of the self-funded program includes special coverage known as stop-loss insurance to protect the plan from these catastrophic claims situations. There are basically two types of stop-loss insurance that can work together or independently: Specific Stop-loss, and Aggregate Stoploss.
Specific Stop-Loss
This coverage protects the plan from large losses on any one plan participant who has a serious accident or illness during the plan year. It accomplishes this by capping the employer’s liability on any individual at a specific dollar amount (deductible). If an individual’s claims exceed that dollar amount, the stop-loss coverage engages and reimburses the employer for all claims paid for the rest of the plan year. Unlike most group insurance products, this coverage is a pooled product much like fire insurance. Specific stop-loss is considered to be the primary protection of the benefit plan assets in this day of $300,000 premature babies and $500,000 transplants, and is essential to the financial solvency of the self-funded plan.
Aggregate Stop-Loss
This coverage protects the plan from inordinate amounts for claims paid on the entire group over the course of the plan year. Aggregate stop-loss is more or less a safety net for the plan as a whole and is helpful for budgeting purposes, because it gives a maximum claims cost for the year. However, aggregate claims liability is experience-rated and usually has a 25 % corridor between expected claims and the maximum aggregate attachment point for the year. Aggregate stop-loss is priced significantly less than specific stop-loss, because it is experience-rated and claims above the specific deductible are not considered under the aggregate. This gives the underwriter a great degree of accuracy in calculating your expected claims, because it is not subject to the volatility of individual large claims. In this sense, the specific coverage is considered to be primary over the aggregate and serves as a stabilizing factor to the plan claims experience.
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Claims
Under a traditional fully insured plan, the employer pays a monthly premium to the insurance company to cover all costs associated with the plan, including claims, administration, risk, reserves, taxes, and so forth. Under a self-funded benefit plan, the employer only funds health claims as they are incurred by employees and their dependents. The most significant difference being that while claims experience remains favorable, excess margins built into the insurance premiums are eliminated. In the event of poor claims experience. the plan uses its stop-loss insurance coverage to control those costs.
Many self-funded plans have instituted claims management services, including POPs, large case management, pre-certification, and so forth, in an attempt to keep the claim costs under their plan to a minimum. These services have proven to be very effective and because you are paying the claims, the savings are reflected back into the plan to prevent the increase of cost to employees and/or the reduction of benefits.
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The information above is based on a general concept of self-funding and is not meant to constitute advice, or represent any provisions of ay policy.
The information in this site should not be used or relied upon as a substitute for the relevant insurance policy wording or relevant policy documents.