Should You Consider Self-Funding?
If you are a public sector employer of 200 or more benefit-eligible employees, self-funding, or self-insuring your medical and pharmacy plan(s) is an essential option to consider. Let’s compare fully insured to self-insured plans:
| Fully Insured | Self-Insured | |
| • Insurance company dictates the cost of the monthly premium to the employer
• Employee/Employer pays a set monthly premium • Insurance company responsible for claims & assumes risk • Insurance company keeps any profit – under the Affordable Care Act this is now limited to 15% • Employer pays 2% Premium Tax |
• Employer with assistance from actuary and/or consultant project annual costs and set a monthly premium
• Employer is responsible for actual cost of all medical & pharmacy claims as well as administrative costs • $0 profit to insurance company • 0% Premium Tax to insurance company • If actual costs are less than contributions collected, employer retains funds in reserves • Reserves can be used to offset “bad” years to modify increases • More plan design control |
If you are fully insured, the insurance carrier determines what your rate or premium cost will be per plan and tier. While the employer along with their consultant can attempt to negotiate this rate, the carrier holds the power in a fully insured scenario. The carrier predicts and projects how your employees will utilize the plan(s) for the year and their rate includes a 2% premium tax and profit margin not to exceed 15%. The insurance carrier assumes all the risk in this scenario. If your total claims and administrative costs are below the premium collected, the insurance carrier keeps that profit. If it is over, you are not obligated to make up the difference, but you will see an increase in your premiums the next plan year
If you are in a self-insured or self-funded scenario, the employer is responsible to pay all medical and pharmacy claims as well as the administrative costs. With the help of an actuary, you decide what your monthly premium and annual budget will be set at and how to fund your plan(s). You save 2% without paying the premium tax and have more control over your contribution strategies, as well as how the plan is structured. You are assuming all risk but will purchase stop-loss coverage to help mitigate that risk. If you have a good year, you build reserves to help offset the bad years, which ideally, can help you modify and stabilize future increases.
A good rule of thumb for self-funding is that your fixed or administrative costs should make up less than 12% of overall costs with the remainder going to pay for claims. The primary concern in a self-insured arrangement is the ability to manage volatility in high-cost claims.
Self-funding will always be cheaper than fully insured over time when well managed.
Valley Schools has successfully managed self-insured group medical and pharmacy plans for our members for over 18 years. All of our self-insured members are individually rated, do not subsidize other member’s claims, and reap the reward of any wellness or claims management efforts. Contact us to learn more about self-insurance, and how Valley Schools can help you eliminate paying profit to the insurance carriers today!
