When is it Right to Self-Fund?

With medical costs rising approximately five times as fast as inflation, the most important factor for employers that offer health insurance coverage to employees is containing the rising costs. Employers oftentimes offer benefits to attract and retain quality employees. The benefits package is typically the second largest expense for employers following payroll. With benefits accounting for this much money in the budget, many employers are desperate to get costs under control. For some, there is a good way to do that; self-funding.

Isn’t Self-Funding Only for Larger Employers?

Self-funding is a health plan strategy that used to be reserved for larger employers. 20 years ago, the price of healthcare for the average American was low enough that a self-funded arrangement needed a sufficient number of people within the plan to make mathematical sense. This meant employers with fewer than 100 employees could find “fully insured” plans for their group that were more affordable than it would have been to self-fund. Since the price of healthcare has continued to rise, this is no longer the reality. In 2018, it is possible to effectively self-fund an employer sponsored health plan covering as few as two people with no additional risk.

Why Self-Fund?

One of the major drivers in this market reversal was the guaranteed issue mandate brought forth by the Affordable Care Act. Employer health plans covering small businesses (typically fewer than 50 employees) were given protection from price increases based on health conditions. This means the insurance company sets their premiums to cover people within certain demographic ranges. Your premium is determined by factors other than health conditions such as age, location, and industry. Thus their premiums are inherently increased to account for groups that previously were ineligible due to the health of their group. With premiums increased, there is now room in the market for self-funded arrangements.

Self-funded health plans have an edge against fully-insured plans for businesses with fewer than 50 employees because they can be underwritten. There is an exemption given to self-funded health plans in the Affordable Care Act that allows companies to deny coverage to a group that wouldn’t benefit from self-funding, as well as base premiums on the health histories of the group. Healthy groups that don’t use many health services will see lower plan costs because there is less risk. To further illustrate this, see the charts below.

Prior to the ACA, fully funded insurance carriers filed their rates at a 1.0 index. Depending on the state, insurance carriers could then increase or decrease their rates by some variance based on health history. In most states, this variance was +/- 25%. Insurance companies would give illustrative proposals to businesses showing their “preferred” rates, which included the 25% “discount” from index. After filling out applications and going through underwriting, those rates could be increased to the “max” rate of 1.25, which resulted in a 67% rate-up. Many groups found themselves in different scenarios, depending on how healthy or how sick their group of members really was. For our purposes, let’s assume we have 2 companies being studied. Company A landed on the left side of the index at .85 prior to the ACA and Company B landed on the right side at 1.20.

Pre ACA chart

After the ACA, insurance companies in the small group segment could not modify rates from their index. In many cases, insurance companies increased their index by as much as 15% to reflect the blend of their pre-ACA book of business. As a result, Company B saw a small decrease by moving to an ACA plan. But Company A saw a significant increase to their premiums after the ACA.

post ACA chart

For an example of the impact, see our case study.

How can I tell if my group should self-fund?

Unfortunately, the process to decide if self-funding is right for you is not as simple as signing up for the plan. To determine if a self-funded plan is a good fit for your organization, you should analyze proposals from several different fully-insured carriers as well as those that offer self-funding. Typically, this can be done with some simple employee data such as names, genders, dates of birth, etc. This information will get you preliminary quotes to see if the pricing difference between self-funding and fully-insured plans is large enough to justify employees filling out health questionnaires. If the price difference is significant, small groups should fill out applications to receive a firm rate offer. If the price difference is negligible, it may not be worth the headache of gathering a health insurance application from each employee. That decision will be up to each organization.

Once firm numbers from all companies are in, an analysis of the programs should be completed to find out which program would be the best fit for the organization. Many employers will look at the price alone, but for self-funded plans this may be misguided. There are many factors to consider when picking a health plan.

Overall, the choice to self-fund relies on only one thing; how healthy is your group? The best way to see if it is a good fit for you is to get quotes, and find out if your group is healthy enough to qualify. If you do qualify, is the pricing competitive enough to justify the switch? Self-funding can help employers contain costs and normalize premium increases over time. Self-funding is not a fit for all employers, and not all employers will benefit from self-funding, but the only way to find out if you can benefit from self-funding is to apply for coverage and go through the underwriting process.