Business Perspectives

More choose self-funded insurance

As health insurance premiums continue to increase, more and more companies are choosing self-funded health insurance plans. Several years ago, self-funded plans were reserved for companies with 200 or more employees.

A creative self-funded arrangement developed for companies with as few as 25 insured employees is gaining popularity. This arrangement has stop-loss protection for the large claims and also offers cash flow protection necessary for smaller companies.

The 2010 Health Plan Survey conducted by United Benefit Advisors reported a 5.2 percentage point increase over 2008 for companies over 1,000 employees who self-fund. Companies with 50 to 99 employees only had a 0.3 percentage point increase from 2008 to 2010.

There are advantages and disadvantages to having a self-funded plan.

Advantages

* Premium taxes: With a self-funded plan, your company eliminates paying most of the premium taxes, which saves between 1 and 2 percent.

* Mandated benefits: Since self-funded plans are governed by ERISA and not the state, your company is not required to include state-mandated benefits.

* Subrogation: A self-funded plan can recover the medical bills against another entity through subrogation. For example, if an employee slips and breaks an arm while shopping in a store and the store is found liable, a self-funded plan can legally recover the medical bills from the store, but a fully funded plan cannot.

* Lower overhead: The overhead charged by the third-party administrator is typically less than an insurance company.

* Eliminating profit: Self-funded plans eliminate the insurance company profit and premium charges for additional risk.

* Claims reserve account: You control setting the level of your reserves, and you have the ability to earn interest on your reserve account.

* Detailed claims information: Self-funded plans allow you to have detailed claims information most insurance companies are not willing to provide.

* Customized benefits: With self-funded plans, benefits can be customized for medical and prescription benefits and not be forced into predetermined plan designs.

Disadvantages

* Assumption of greater risk: Self-funding does require a company to assume a greater level of risk. However, the risk can be substantially minimized with the purchase of proper stop-loss insurance.

* Fiduciary responsibility: With a self-funded plan, the plan administrator, typically the employer, is named as a fiduciary of the health insurance plan and is legally responsible for operating the plan.

* Detailed claims information: The employer must appoint a HIPAA Privacy Officer to protect the extremely private claims information. Since the company will receive detailed claims information not previously available, this new information must be kept secure from all other employees and used only for the management and administration of the group health insurance plan.

* Renewal timeline: Self-funded rates typically are not "locked in" until 30 to 45 days prior to the renewal date. The insurance company providing the stop-loss insurance requires a disclosure of any ongoing health conditions.

More companies are implementing self-funded health insurance plans. Two of the most common reasons are having access to detailed claims information and flexibility to customize the benefits of the plan.

Self-funded health insurance is an important option for employers to consider. Employers must carefully analyze ongoing and potential claims, cash flow, administrative capabilities and proposed benefits, before they can determine whether self funding makes sense for their company.

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