Self Funded Health Insurance
Prices for health care services continue to rise. Total costs for health care in the United States are in the trillions of dollars. With elevated medical costs come the increases in health insurance premiums. The situation has become so grave that many employers in the United States simply cannot afford to remain competitive in a global marketplace and provide health insurance coverage for their employees. This is precisely why more and more companies are choosing to create self-funded health insurance programs.
A self-funded health insurance program is precisely what the name implies: a company or business pools their assets and decides to cover the medical costs of their employees themselves rather than paying an insurance company to do so. In theory, this idea should work great because insurance companies collect premiums and do the exact same thing. However, the premium charged by a health insurance company is used for:
-Paying claims related to and covered by the plan
-Administrative costs for maintaining the plan
-Profits
Saving Money
There are two reasons why a self-funded health insurance plan should save the company money. First, the administrative costs should be lower as the business presumably already has Human Resources personnel that can administer the plan. Secondly, the profits normally earned by a health insurance company can instead be used to help fund the plan and keep costs low.
Limitations
Self funded health plans are not ideal for all companies. A company needs enough employees to make it a feasible option. The more employees, the more viable this option becomes because there is more money available to cover the costs of claims.
Specific Stop-Loss Reinsurance
Only one or two catastrophic claims can really drain a self-funded plan and expose the company to risk. This is why it is common for businesses to purchase Specific Stop-Loss reinsurance. While this may sound complicated, the basic premise is very simple: The Specific Stop-Loss reinsurance will cover all claims exceeding a specific limit. Therefore, a company can use this reinsurance to limit vulnerability to risk. The higher the pre-set limit is, the lower this special type of reinsurance will cost.
Even when a business has Specific Stop-Loss reinsurance, there is still the possibility of a large number of claims that fall short of the pre-set limit. The business with the self-funded health insurance plan would be liable for all of those claims unless they had Aggregate Stop-Loss reinsurance. With this special version of Stop-Loss reinsurance, the business is insulated against high utilization rates.
Considerations
Even for businesses with a large number of employees, the decision to go with a self-funded plan needs to be weighed carefully. The core demographics of a business will tend to play a critical role in any insurance plan, especially a self-funded one. For instance, if the average age of workers is low, then the chances for high-utilization may be higher (due to small children). However, the odds of multiple catastrophic claims is relatively low when compared to a company with a higher average age of its workforce.
Finally, the type of work actually performed by the business should be factored into any decision regarding self-funded health insurance plans. After all, the risks inherent to a business comprised primarily of white-collar workers will naturally be lower than one that is primarily industrial in nature.
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