Self funding or self funded insurance is a plan in which the employer takes on the financial risk of providing healthcare benefits to his or her employees. This is different from traditional health insurance in which an employer pays a pre-determined premium to an insurance provider for a fully insured plan.
How Does Self Funding Insurance Work?
When an employer decides to provide employees with healthcare through self funding, there will be typically set up a special trust fund dedicated for money set aside to later pay incurred claims. Employers rely on third party administration providers (TPAs) to deal with claims on their behalf. TPAs may also provide additional services, such as collecting premiums, providing claims reports and overall service for the benefit plan set up by employer.
Healthcare claims can either be subcontracted to a TPA or can be completed in-house.
Employers who consider self-funded insurance plans may be, understandigly, worried about the occurrence of catastrophic claims. But fortunately, there is a way for employers to protect against unpredicted claims and avoid financial distress. While larger employers typically have enough financial reserves on hand to cover nearly any healthcare costs, some smaller businesses may not have a large reserve. To cover catastrophic claims, these businesses rely on stop-loss insurance. With stop-loss insurance, employers are reimbursed for any claims that fall above a specific arranged amount. This can be highly beneficial for employers who want to switch to self funding insurance but do not yet have the funds to cover exorbitant healthcare costs.
Why Switch to Self Funding Insurance?
Cost Savings from Benefit Design Changes
Self-funded employers can save money on their health plans per each enrolled person then they would have with traditional insurance. This is because TPAs work to manage an employer’s plan based on the employer’s specifications instead of according to an insurance provider’s policy. Self funded insurance can save employers money through individualized plan management without the need for discounts or marketing schemes.
Increased Flexibility and Control of Plan
Health insurance should always fit best with your company's needs. To meet the unique needs of your employees and best suit your business, self-funded insurance allows for more flexibility and control over the terms. With self funding insurance, employers have the opportunity to custom design their benefits. You can choose healthcare solutions that fit your needs and adjust them over time as needed.
Enhanced Flow of Cash
Improved cash flow is one of the biggest reasons employers are choosing to switch to self funding insurance. Unlike traditional health insurance plans which require employers to pre-pay for potential claims through monthly premiums, a self-funded health insurance policy provides businesses with more flexibility. As employers are only required to pay claims as services are used, they have more control over their cash flow. Many employers who use self funding insurance find that they are more in control of their cash flow and have a higher possibility for extra savings.
Cost Savings from Reduced Premiums
Employers who use self funding insurance do not pay insurance tax. With a self-funded policy, premiums are only collected with excess loss coverage which is typically a fraction of the standard insured premium. This means that premiums are significantly reduced for employers who have self funding insurance. Employers may also save in other areas. For example, insurance companies often charge extra fees such as risk and retention charges. These types of charges are not applicable on self-funded plans.
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