You decided to self-fund your health insurance…Now what?

July 25, 2023

David Stoddard


3 men in suits

For many employers who offer health insurance to their employees, moving from a fully insured or level-funded arrangement to a self-funded arrangement can be an effective way to achieve cost savings. Self-funding:

  • Reduces fixed costs and carrier retention built into fully insured premiums.
  • Allows a plan to access prescription drug rebates, which reduces overall costs.
  • Provides flexibility, control, and access to deeper data that fully insured does not.

However, the savings come with a few new considerations that you need to be aware of if you truly want to enhance your self-funded experience. 


Increased Administrative Burden  

An additional administrative burden comes with self-funding. Rather than just paying a monthly premium to an insurance carrier, the employer is responsible for all aspects of the plan — claims, enrollment, compliance, vendors, etc. Most employers will work with a third-party administrator (TPA) to help manage this administrative burden. A TPA will monitor and pay claims, process eligibility, and assist with compliance. The TPA will typically charge a fixed per employee per month (PEPM) fee and send the employer claims invoices monthly. 

Working With Other Vendors  

In addition to a TPA, you must choose a pharmacy benefit manager (PBM), stop loss carrier, and potentially other point solution vendors (e.g., care navigation, disease management). A PBM works like a TPA, except a PBM handles pharmacy claims instead of medical. PBMs also provide rebates associated with certain prescription drug claims. Stop-loss carriers cover large claims in exchange for a fixed PEPM premium. You may also want to work with a care navigation vendor or certain disease management vendors (if a particular disease(s) is prevalent in the plan population, such as diabetes, hypertension, or cancer). By being self-funded, the company is responsible for its own claims, and implementing disease management programs can be a cost-effective way to manage those claims. 

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Understanding Cash Flow: 

Rather than paying a fixed monthly premium, a self-funded employer pays claims as they are processed and paid by the TPA each month. While that can be unsettling for someone new to self-funding, it also has some advantages. You should work closely with a TPA and/or benefits consultant to properly budget the expected annual claims. In the first year, it is prudent to budget conservatively to build up a reserve in the event of adverse claims experience. With an actuarially sound budget, you will be more than prepared to understand claim amounts as they are billed. The budget can also be used to calculate premium equivalent rates, which will help establish employee contributions. 

Additionally, in the first year of self-funding, claims paid will be artificially low, specifically in the first few months. For most claims, there is a delay between when a claim is incurred and when it is paid. This is known as a “claims lag.” Because of the claims lag, there may be no medical claims billed in the first month, and the second and third months may also be lower than “budgeted.” By the fourth month, claims will likely have caught up to the lag and should average out to budgeted levels from then on. Because the low claims in the first few months are just a delay in claims being processed and paid, it is important that the budget be calculated on an incurred rather than a paid basis. You are ultimately responsible for the claims incurred, regardless of when they are paid, and most employers will book the liability for claims incurred but not paid (IBNP) at the end of the year as a liability for the past year, rather than the upcoming year, for financial purposes. Stop-loss premiums will also be lower in the first year due to the artificially low claims. You should expect stop loss premiums to increase by about 30% on average from year one to year two; however, the increase is just converting the immature year one to a mature year two, similarly as claims mature from the first year to the second.  

 Monitor Claims Data And Use It To Your Advantage: 

One of the main benefits of self-funding is that the company is in control of its own data. You may access that data whenever you want, and data will typically be reported monthly. The focus in the first year should primarily be on how closely claims are running against expectations. However, once there are a full 12 months of incurred claims, you can also look at year-over-year per employee and per member trends, changes in the cost of services and utilization, and the significant drivers of medical and prescription drug claims. Understanding and analyzing the data, in conjunction with your benefits consultant, is the key to reaping the full rewards of self-funding. Once key cost drivers are identified, solutions can be implemented to control costs while maintaining benefits and improving outcomes.

Self-funding employer-sponsored health insurance can be a complex and challenging process. Still, it can also reduce costs and improve overall employee (and their dependents) health in a way that a fully-insured arrangement cannot. By understanding the considerations outlined in this article, you can help ensure that your self-funded health plan is a success in the first year and beyond.

 

About the Author

 David Stoddard

Vice President, Director of Analytics and Actuarial Services

  • David leads national initiatives for World Insurance Associates focused on creating new, scalable, data-driven solutions for clients.
  • David has over 10 years of experience in the health care industry as a lead health benefits actuary performing high impact actuarial consulting for large multi-state employers in a variety of industries.