Controlling Costs

Self-funding and Controlling Costs

Learn how businesses with Midwest headquarters are using self-funding to control costs.

  • Member Testimonial Video: Flambeau, Inc.
  • Member Testimonial: Lowering Costs
  • Member Case Study: Seats, Inc.
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Can you use self-funding to lower your costs?

Businesses want to know whether their health care “spend” is purchasing high-quality care at a fair price. They want to know what causes costs to rise and fall. They want to engage employees in making better health care decisions so they can avoid overtreatment and reduce out-of-pocket spending.

Self-funding can help you address those needs by providing access to data about when and where employees use health care. While self-funding can’t solve all of an organization’s health care problems, it can make it possible to start moving health care toward better solutions for high-quality, fairly priced care.

How does self-funding differ from fully-insured options?

Understanding self-funding begins with understanding that risk transfer costs money. When you purchase a fully-insured plan, you are transferring the risk to an insurance company and paying them to take it on. When you use a self-insured plan, you are saving money by managing the risk yourself.

Self-funding allows you to capture the benefits of:

  • Actively working toward a healthier, more productive workforce. When you are self-funded, these efforts typically transfer directly to the bottom line.
  • Flexible plan designs that help you achieve specific objectives. You may choose to pursue value-based insurance design, for example, to encourage employees to obtain care for chronic conditions before they escalate. Self-funding also exempts businesses from state mandates for health coverage.
  • Pursuing utilization control programs that match your goals and your workforce. Instead of being restricted to the insurance company’s offerings, you can select programs based on your needs. Options might include care coordination, disease management and pharmacy benefits.
  • Exploring new ways to pay for care. You can use incentives and plan design to guide employees to high-quality, fairly priced care. For example, businesses who are members of The Alliance can use the QualityPathprogram to guide patients to high-quality care with a bundled price that lowers or eliminates patients’ out-of-pocket costs while giving them a 90-day warranty on select surgeries.
  • Engaging consumers in cost and quality. Self-funding can help you launch a consumer-directed health plan (CDHP) and engage employees in decisions about their health. For example, The Alliance offers the Find a Doctor website so employees and family members can learn about the cost and quality of their care before they choose a doctor, hospital or health service.

Savings will vary based on your workforce, your plan design and the medical expenses that occur during a specific plan year. Businesses typically experience the greatest savings when they pursue self-funding as a long-term strategy.

How do self-funded employers budget for expenses?

Self-funded businesses gain more control of cash flow and retain any savings they experience. Instead of paying money to the insurance company in the form of reserves or as pre-paid premiums, an organization with a self-funded health plan typically will:

  • Pay for expenses only after they are incurred.
  • Capture the interest on reserves, which are now held by the self-funded company.
  • No longer have to pay the premium tax, which typically represents 2 to 3 percent of the fully-insured premium amount. Insurance companies typically pass this tax on to their customers.

Comparison of funding for self-insured and fully-insured health benefit plans

Self-funded

  • The business that offers the health plan assumes the risk, with stop-loss insurance providing financial protection against catastrophic claims.
  • The business can pay medical claims in one of two ways:
    • As incurred, like any other corporate expenses
    • By monthly deposits of expected or maximum costs into an account
  • After claims are paid, the business keeps the year-end difference, including interest income
Fully Insured

  • Coverage is purchased from an insurance carrier.
  • Premiums are determined annually based on:
    • Employee group size
    • Claims experience
    • Carrier’s desired profit margin

How do self-funded businesses and organizations protect themselves from large or catastrophic claims?

Stop-loss insurance limits an organization’s exposure for eligible medical expense costs associated with a plan year. Two types of stop-loss insurance are needed:

  • Specific stop-loss limits the organization’s exposure for the eligible medical expenses of each covered individual during a plan year.
  • Aggregate stop-loss limits exposure for eligible medical expenses for all covered individuals during the entire plan year.

How do you get started?

The Alliance has more than 25 years of experience in helping businesses capture the benefits of self-funding. If you’re considering self-funding, contact The Alliance for a presentation tailored to your workforce and your needs.

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