» Myths About Self-Funded Health Insurance
January 19, 2022
Employee Benefits, Healthcare Innovation, Healthcare Spending, Self-Funding
One of our go-to tools to better manage health plans and deliver affordable healthcare to employers is a self-funded health plan. And while these plans promise transparency and control, employers may be wary for various reasons, some grounded, others not so much.
While the full list of myths and misconceptions is inexhaustible, let’s tackle some of the most common myths below.
Myth: Self-funded health insurance is only for big employers
False: While everyone may have a different definition of large and small employers, self-funding is an option for the small and mid-sized market, down to 25 lives even in some cases
According to the Kaiser Family Foundation, 31% of employees at small companies had health benefits through self-funded health insurance in 2020, up from 24% in 2019. This tells us that groups with self-funded health insurance plans seek greater control and transparency over their health insurance plans and costs.
This is a goal that employers of various sizes share, and as demonstrated, small employers are not precluded from achieving it. While hurdles do exist, small and mid-sized employers do have a number of options to manage their plan and accompanying risk such that they recognize serious quantitative and qualitative benefits from their self-funded health plan.
Myth: Self-funded health insurance is an administrative burden
False: Self-funded plans may require some additional strategic discussion, but human resources teams do not become plan administrators or become responsible for processing claims
In fact, some groups may hire additional HR staff with the savings generated by their self-funded health plan.
Remember, a self-funded health plan utilizes key vendor relationships including a third-party administrator or TPA who administers the plan. The TPA enrolls employees, processes claims and terminations, and takes on administrative responsibilities from the prior fully-insured insurance carrier.
It’s important to understand that while the fully-insured and self-insured question is binary – you’re either one or the other – there are in fact many flavors of self-funded health plans. Think of a fully-insured plan as buying a suit off-the-rack with no alterations. A self-funded plan is a tailored suit – we can just tailor a suit from a retailer with minor adjustments, we can go complete bespoke suit so you’re dressed to the nines, or anywhere in the middle.
We can make it look and feel exactly like a traditional BUCA plan for employees, we can put significant guardrails on maximum costs for the employer, we can bring in an extensive library of cost containment vendors and solutions… it all just comes down to the goals and concerns of the employer.
This is where our consulting work focuses – what is right for the group now and into the future?
Myth: A self-funded plan will create too much disruption
False: a self-funded health plan can look and feel exactly the same to employees as a fully-insured plan
Self-funded plans are customizable tools and can be tailored to the needs of a specific group in a number of ways. We can pick and choose the plan network and can mirror the network and plan design from the prior plan. Employees will have the same network and the same cost-sharing, so it looks and feels the same as before with no change.
Some plan changes do create the possibility of disruption – if you increase deductibles or introduce narrow networks, noise is inevitable. Our goal is to increase employee access to affordable and quality healthcare, so some disruption may advance this goal but elicit an email or call from employees. Each employer will need to do a risk/reward assessment for any plan change, just as they do if they change from Anthem to Aetna.
Myth: Self-funded health insurance is risky
False: a self-funded plan does have risk, just as a fully-insured plan does, but the exposure is typically overblown
The basis of a self-funded health plan is that a group becomes responsible for paying claims, rather than relying on an insurance carrier to pay first dollar claims. Without the complete risk adoption of the fully-insured plan carrier, an employer uses stop-loss insurance to set limits on total costs by member and aggregate group claims. These set limits on maximum costs and the total risk of the plan.
Now, it’s definitely true that a self-funded plan has variable costs. Claims may be $10,000 in a month and $50,000 the next – this is typical. The uneven cash flow can be a stumbling block for groups but given the proper context, groups may see the long-term value of a self-funded plan.
Would you rather pay $300,000 evenly for the year or $250,000 but in different amounts by month? Why are constant cost increases to the order of 8 to 12% accepted as not volatile while paying a variable amount month to month but a lower aggregate amount year after year considered risky?
Why is a complete lack of transparency and lack of control not risky? And how is a misalignment of incentives between a group and a carrier not considered risky?
A consultant, TPA, pass-through PBM, and more are all highly aligned with a self-funded health plan. The same cannot be said for a health insurance carrier.
If an employer has quite stable revenue and may have issues with variable claims costs, they can look at certain strategies such as level-funded health plans. There are tools and techniques to smooth out claims costs but still retain the structure and benefit of a self-funded health plan.
At the end of the day, more and more employers are shifting to some form of self-funded health insurance plan. As consultants, we help advise companies on how best to adopt this strategy over a timeline longer than 12 months for best results and experience. It’s not a one-time transaction, it’s a different way of contracting and delivering healthcare so employees can get accessible and affordable healthcare that delivers high-quality outcomes.
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Posted by John Hansbrough in Employee Benefits, Healthcare Innovation, Healthcare Spending, Self-Funding