» What Self-Funding Rates by State Tell Us About Health Insurance

We work with employers who use a variety of funding methods for their employee benefit plans. Some groups may use fully-insured health insurance plans from carriers, and others may self-fund their employee health plans with stop-loss insurance and captive managers. We work with groups in and out of California, and it’s interesting to see state differences in the trend of self-funding. The differences by state and employer size are highly instructive, so let’s explore these trends in greater detail.

Overall, rates of self-funding have been increasing, according to recent Employee Health Benefit Survey results. Sixty-five percent of covered workers are enrolled in plans that are self-funded. When we break this out by size, we find that 20 percent of covered workers at small employers are enrolled in self-funded health plans, while the rate is 82 percent for large firms. Note that KFF defines small as 3-199 employees and large as 200 or higher.

Some small groups who self-fund report using a level-funded plan, which is a form of self-funding with more consistent payments and less variability compared to fully-insured health insurance. 38 percent of small firms reported offering a level-funded plan, a much higher number than in the years before 2021, suggesting the small group market is undergoing a shift. And according to research by the EBRI, this shift has been on-going since the 90’s!

This is likely due to the year-after-year increases of fully insured premiums and greater costs being shifted onto employees. Both of these trends impact whether employees can afford health insurance and by extension health care, and push employers to reduce costs any way they can. But as we’ll see, this dynamic has not played out equally across the country.

The Employee Benefits Research Institute released some great data on rates of self-funding by state in 2020. I’ll pull out two graphics from the report: a map of self-funding by state, and a chart breaking down self-funding rates in each state overall and among certain employer sizes.

Rates of Self-Funding by State

We can see lower rates of self-funding in western states, most notably California with a self-funding rate of just 41.7 percent, a state that represents 15 percent alone of the US’ total GDP!

Meanwhile, we see the greatest rates of self-funding in states like Nebraska, Indiana, Ohio, West Virginia, Kentucky, and North Carolina. For example, self-funding rates are 73 percent in Nebraska, 70 percent in Indiana, and 69 percent in Ohio.

How do these rates look when we break out the rates by company size?

Rates of Self-Funding by State and Employer Size

This gets interesting! One comparison we can draw here is that a California employer with more than 1,000 employees is as likely to self-fund as employers with 100-999 employees in states such as North Carolina, South Carolina, Indiana, and Ohio.

What do we think is going on here? I’d refer you to Dr. Eric Bricker’s excellent breakdown of this data. He points to a handful of possible explanations, including:

The states with the highest rates of self-funding tend to have a greater concentration of low-margin businesses such as manufacturing. Businesses with lower margins are more focused on being cost-effective across the organization, benefits included. We see this in our employers who come to us every renewal looking for every opportunity to manage costs – these tend to be the auto dealers, manufacturers, blue-collar employers etc.

On the other hand, businesses with high margins, such as finance and software (California and New York, for example), are less focused on being cost-effective with their spending because earning another dollar of revenue is much more valuable to them than finding a dollar of savings.

Another way to think about this dynamic between low- and high-margin businesses is the Profit per Employee. Here’s why:

Health savings matter more with low margins: For businesses with a low PPE, finding a $50 PEPM savings makes a much bigger impact to their bottom line than a business with a high PPE. For some of our employers, we’ve suggested a self-funding change that may save $500,000 per year – meanwhile, their CFO and executive team are also considering multi-million dollar decisions. Which ones do you think get more attention? High margin businesses tend to care less about cost-cutting opportunities than low-margin ones.

Recruiting Costs Increase with PPE: It’s expensive to replace any employee, to be sure. But replacing a Chief of Sales or a software engineer making $200,000+ per year is more expensive than a floor associate making $60,000 per year. Self-funding does not always create noise, but sometimes it does – is the employer sensitive to employee concerns around benefits or not? This may dissuade them from considering self-funding.

Some of the states with low rates of self-funding also have greater rates of capitation or HMOs, such as California with Kaiser and other HMO networks. These plans tend to cost less per employee and compete better with self-funding than wide-open PPO plans in other states.

This all being said, I’d like to close by reminding you that self-funding has been on the rise in general. Employers are looking for cost savings opportunities across industries and employer size, and more and more of the innovation in healthcare delivery and finance is occurring in the self-funding market, not the fully-insured market.

Do some employers need to stay in the fully-insured market? Absolutely. But many more mid-market employers, which is the 100-999 employee range, should be considering self-funding in states such as California, Arizona, and New Mexico, and new tools are coming out every year that make self-funding simpler and more accessible. If you want to consider self-funding at your next renewal, schedule a complimentary call with one of our benefits consultants today!

Posted by John Hansbrough in Business Strategies, Digital Health, Employee Benefits, Health Insurance, Healthcare Innovation, Human Resources, Research, Self-Funding