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- Why Self-Funding?
- What is Self-Funding?
- How does Self-funding work?
- Increase cash flow and control the flow of money
- Employer Control
- Stop-loss Insurance
- Information Request Form
Why Self-Funding ?
During these times of ever spiraling health care costs, many employers are finding it increasingly difficult to provide their employees with comprehensive health care benefits. Health care costs rank as the number one contributor to the national inflation rate. Many employers have sought an alternative approach. The solution that has stabilized costs and enabled the continuation of high quality benefits has been Self-Funding. Over 56% of all employer sponsored plans nationally are self-funded. Self-funding provides the mechanism for employers to control the flow of its money, investment income, and by so doing, derive substantially reduced costs.
What is Self-Funding?
Under a self-funded plan, the employer is responsible for funding payments needed to pay plan benefits. Stop-loss insurance coverage is obtained to limit the potential liability of the employer, that is, to minimize the effect of any large claim or claims and the possible adverse affect they would have on the fiscal integrity of the plan.
Self-funding is based on the concept that health insurance is designed to protect against two different areas of exposure; predictable costs and unpredictable costs.
Predictable costs should be funded and paid by the employer. Purchasing insurance to cover predictable claims is not cost effective due to loads for overhead, taxes, profit, sales commission, reserves, etc., in addition to the full amount of the predictable claims. Self-funding these predictable claims results in a direct saving of medical insurance premium loads.
Unpredictable costs, such as shock claims or catastrophic losses, are justifiably insured through an excess-loss contract with an insurance carrier. Premiums are much lower for this type of coverage, so the insurance company loads are correspondingly lower.
On an insured basis, the employer would be required to pay to the carrier, in accordance with a predetermined timetable, a fixed premium (prospective payment) which provides for the carrier's prospective estimate of average claims to be paid, reserves, administrative expenses, taxes, and a margin for profit as well as a margin for deviation in annual utilization. On a Self-funded basis, the group would only pay for claim expenses as they are presented (retrospective payment). On an insured basis, the carrier invests those prefixed premium dollars (prospective payments), in excess of the actual paid claims and expenses, for its own profit. On a Self-funded basis, the group would have these same funds available to invest for its own benefit. In conjunction with the substantial investment income advantages derived by self-funding, there are additional advantages that the self-funded employer realizes at Island Group Administration Inc.
How does Self-Funding work?
An employer who decides to implement self-funding first retains a third party administrator (TPA). Together they decided upon a plan of benefits, usually similar to the fully-insured group plan being replaced. Often the TPA will suggest various cost containment measures which may be utilized in the plan. The TPA provides the plan document, distributes certificates to the employees, pay eligible claims and maintains all records for the employer. The TPA also helps determine the amount of employer funds which must be contributed to the plan. To offset unpredictable costs, the TPA will generally advise that the plan purchase an excess-loss insurance contract.
Increase cash flow and control the flow of money
On an insured basis, the employer would be required to pay to the carrier, in accordance with a predetermined timetable, a fixed premium (prospective payment) which provides for the carrier's prospective estimate of average claims to be paid, reserves, administrative expenses, taxes, and a margin for profit as well as a margin for deviation in annual utilization. On a Self-funded basis, the group would only pay for claim expenses as they are presented (retrospective payment).
A self-funded plan does not require prospective payment of future claims, or reserves for "incurred but not paid" claims. This allows the employer full usage of working capital and interest earnings on any monies in the insurance fund.
Fixed costs of a self-funded plan are normally less than those of a conventional fully insured plan. Savings results from lower administrative costs, no premium taxes, no commissions, no profit or surplus contribution, no rate stabilization reserves, access to discounts by way of Participating Providers (PPO) Networks, specialized pharmacy plans, reasonable stop-loss premiums, lower overhead etc.
Employer Control
Island group will provide assistance in custom designing a health plan program specifically tailored to the needs of the client. Unlike an insurance company, Island Group is not subject to many state insurance department regulations. This means that our client's plans may include a wider range of benefits that may not be available under conventionally insured plans.
Stop-loss Insurance
Island Group will assist the client with the purchase of stop-loss insurance, which is an important component of the self-funded program. Under a self-funded plan, the employer is responsible for funding payments needed to pay plan benefits. Stop-loss insurance coverage is obtained to limit the potential liability of the employer, that is, to minimize the effect of any large claim or claims and the possible adverse affect they would have on the fiscal integrity of the plan. Stop-loss insurance protects the employer in a "bad" claims year. In a "good" claims year, the savings in paid claims are available immediately since the funds remains in the employer's control.
Aggregate excess-loss insurance limits the overall annual claims exposure of the employer's self-funded plan. The employer is expected to fund the predictable claims cost. Predictable (expected) paid claims make up the employer's annual aggregate deductible. If eligible claims paid by the TPA during the contract period exceed the annual aggregate deductible, the aggregate excess-loss insurance reimburses the employer at the end of the contract period for the excess amount.
Individual excess-loss insurance protects the employer's self-funded plan from losses due to catastrophic claims attributed to any on individual. A per-person deductible is established based on the size of the group and the amount of risk the employer wants to assume. If eligible medical claims paid for any individual exceed this deductible, the payments made in excess of the deductible are reimbursed to the employer under the individual excess-loss insurance contract.
Examples of Individual and aggregate excess-loss coverage:
- (12/12) contract provides coverage for claims incurred and paid in the 12 month contract period.
- (12/15) contract provides coverage for claims incurred in the 12 month contract period and paid in that contract period plus 3 month thereafter.
- (15/12) contract provides coverage
for claims incurred in the 12 month contract
period plus 3 months prior to that period
and paid in the 12 month contract period.
