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Self-Funded Health Insurance

As health insurance premiums continue to rise year after year, self funding is an alternative option for employers who wish to provide health insurance for their employees. Instead of paying monthly premiums to an insurance company, the employer pays the health care costs of its employees directly to the health care providers.

Self funded health insurance is not for all employers. There are a number of advantages and risks, and each employer needs to do a cash-flow and risk analysis for their particular company and group of employees. Companies should analyse their workforce’s claims history and consider the demographics of their employees and their dependants. In a low claim year self funding can result in cost savings to employers, but when claims are higher than expected the company still has to meet the costs which can put pressure on cash flow. Companies with a hundred or more employees are able to spread the risk more easily than smaller companies if one or two employees have serious health issues.

Self funded health insurance can have a number of advantages. Companies that self-insure are exempt from state regulations for minimum coverage, so they are able to customize the health coverage for their workforce and make changes when needed. Tax advantages can result from self funded plans as they are exempt from state taxes.

Companies have two choices within self funding: to be fully self-insured and assume the full risk of health claims, or to purchase additional stop-loss coverage which caps the risk at a set maximum depending on the company’s size and cash flow. A 12/15 stop-loss policy covers claims from a 12 month period which are submitted for payment within 15 months and can be specific for individual members or aggregate for all members of the workforce or both. Under stop-loss coverage an insurer can increase the deductibles for an individual member or group of members if they make greater than expected claims. Companies can try to negotiate multi-year contracts to defray risks.

As with health insurance provided by insurance companies, self funded plans can offer the full range of insurance plans, whether managed care such as Health Maintenance Organization (HMO), Preferred Provider Organization (PPO) or Point-Of-Service (POS) or indemnity (fee-for service) plans.

Because of the complex paperwork involved in self-funded insurance plans, many companies use a third-party administrator to process and pay the claims and provide access to a network of health care providers and prescription drug card programs. Administration can also be handled by an insurance company under an “administration only” contract.

If a company has a relatively healthy workforce and the cash flow to absorb unexpected claims, self funded health insurance can be a cost-effective way of providing health benefits to employees.