After the Affordable Care Act was passed, many small employers lost an important advantage when buying health insurance.
In the past, small businesses could qualify for lower rates from insurance companies if they had a healthier workforce that didn’t file as many claims. Now, however, the ACA’s community rating rules prevent insurers from taking those facts into consideration. It’s led to more expensive premiums for some companies.
One alternative—and it’s one that not all employers know about—is the partially self-funded plan.
How Self-Funded Plans Work
Basically, a self-funded plan is what it sounds like. The company pays for employees’ health care using (mostly) its own assets and employee contributions.
Except, instead of sending a premium payment to an insurance company every month, the money goes to three “buckets”:
Administration // Companies with self-funded plans usually contract with a third-party benefits administrator who handles the day-to-day work that traditional insurers do, such as making payments to doctors’ offices and hospitals. The administrator can help companies design a plan that’s tailored to their needs.
It is possible for companies to handle the administrative end internally, without an outside benefits administrator, but it might not be cost-effective to do so.
Stop-Loss Reinsurance // Remember the “mostly” from a couple paragraphs ago? Employers who choose self-funded plans usually buy reinsurance from carriers. That way, if an employee has a prohibitively expensive claim, the reinsurer steps in and helps pay the bills.
A loss doesn’t have to be catastrophic or completely exhaust an employer’s assets before that reinsurer helps out. If an employee has a $1 million claim, the stop-loss policy might kick in after the first $25,000.
Keep in mind, if a company suffers several high-dollar claims, the next year’s reinsurance cost will reflect that, the way that any other kind of insurance would.
Reserves // Most companies with self-funded plans also create an account where they set aside money to pay for employees’ bills as they pop up. If there are no claims—maybe your team has a perfectly healthy year—you get to hold on to that money.
In most cases, the cost of a self-funded plan tends to be less than what you can find from a traditional insurer.
Not Just for the Big Guys
While they have a different structure, self-funded plans otherwise look, feel and smell like the kind of coverage you can buy from a traditional insurer. And you get to bypass a lot of Affordable Care Act rules.
For example, companies with self-funded plans aren’t forced to pay the health insurance tax (or “HIT tax”) that went into effect last year. That tax is about 2 percent and will grow in coming years for those with fully insured plans.
Self-funded plans avoid the medical loss ratio rule, too, which requires traditional insurance plans to spend at least 80 percent of their premiums on health care.
Self-funded plans also can ask about an employee’s medical history and assess individual risk when applying for reinsurance. The drawback is that setting up a self-funded plan can take longer than working with a traditional insurer.
Historically, self-funded plans have been more common among larger employers. But that’s changing. According to the Kaiser Family Foundation, more than 60 percent of U.S. employees were covered by self-funded plans last year. That’s a big increase compared to 1999, when only 44 percent of workers could say that.
Lower costs, less red tape—there’s no reason not to take a look at self-funded plans.