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Self-funded Insurance Plans Combat Rising Health Care Costs

As the cost of health insurance continues to rise, employers are forced to make tough decisions about coverage, contributions and deductibles for their employees.

With businesses continuing to struggle in their search for affordable health insurance solutions, the appeal of self-funded plans continues to grow. Self- funding has been commonplace with large companies for some time but remains rare among small and mid-sized employers.

Self-funded health insurance has been described as an arrangement in which an employer provides health or disability benefits to employees with its own funds. The self-funding option can potentially help employers mitigate the risk of rising health insurance premiums while continuing to assist employees with health coverage.

The Employee Retirement Income Security Act of 1974 (ERISA) permits companies to pre-empt state legislation and design benefit plans tailored for their staff, which can save the company money. As a result, a self-funded arrangement can provide cost savings for business owners and their employees.

According to an Employee Benefit Research Institute report, the number of mid-sized firms adopting self-funded health care plans has risen about 19 percent in the past two years.

With a self-funded plan there are two main costs to consider: fixed and variable.

The fixed costs include administrative fees, any stop-loss premiums and any other set fees charged per employee. These costs are billed monthly by the third-party administrator and are charged based on plan enrollment.

The variable costs include payment of claims. These costs vary from month to month based on health care use by those who are covered.

Self-Funded Plans for Smaller Businesses

Self-funded plans are now gaining popularity for businesses with 10-100 employees. The new plans include:

  • Savings of up to 20 percent for some groups
  • Opportunity for credit refund at end of plan year
  • Predictable monthly payments
  • A choice of plans
  • Stop-loss reinsurance
  • Professional service for claims and payments
  • Broad provider network 

How it Works

Employers pay a monthly fee made up of:

  • A maximum claims amount based on the health of employees
  • An administration fee that covers the cost of claims processing and care management
  • A stop-loss premium covering the cost of insurance on higher-than-expected claims

Self-funding insurance plans offer a high level of flexibility and customization, allowing groups to select from an array of benefit plan configurations and administration options. These plans are a great option for smaller businesses needing relief from rising health care costs.