Highlights
- Self-funded employee health plans are an alternative financing option for employee benefits programs.
- Self-funded health insurance offers multiple advantages over traditional plans, such as transparency, flexibility, and control.
- When using a self-insured plan, an effective budget is crucial for program sustainability and minimizing plan costs for quality care.
If you’re thinking about implementing a self-funded employee health plan, you need to know the budgeting basics to set your small to midsize business up for success. Based on a segment of our “Three Easy Pieces” webinar series led by industry experts Chad Buskirk and Lisa Kerr and moderated by Terri White — and now available on demand — we share tips and considerations for smaller companies about budgeting for a self-funded insurance plan.
Check out our Part 1 of our “Three Easy Pieces” webinar “Self-Funding 101: How Self-Funded Health Insurance Works,” now available on demand.
Effective Budgeting for Self-Funded Employee Health Insurance
Self-funding refers to an alternative financing option for employee health benefits. With self-funded health insurance, employers assume the financial risk of providing healthcare coverage for their employees instead of purchasing traditional fully insured plans. The self-insured employer does this by setting aside funds to cover the cost of healthcare claims and related expenses.
Effective budgeting is a must for self-funding models — a healthy financial plan ensures the stability and success of a healthcare benefits program. Establishing a well-defined budget ensures you allocate funds appropriately, monitor expenses, and select healthcare plan elements that maximize the value of your self-funded plan.
With a little budgeting and planning, you can self-insure your employee health benefits and spend less than a traditional fully insured model.
Advantages of Self-Funding
Self-funded group captive plans offer multiple advantages over fully insured plans, including greater transparency, control, and flexibility. With self-insurance, you have a clear view of the costs associated with your employee healthcare benefits, enabling you to analyze expenses, identify areas for cost containment, and optimize the allocation of resources.
With the ability to customize your plan design, you can tailor the benefits package to meet the specific needs of your workforce, resulting in higher employee satisfaction and engagement. And the best part is you can achieve this for a lower cost than you would under a traditional fully insured plan.
Long-Term Expense Management
Managing expenses in the long term is a special advantage to self-funding. Employers need to adopt a proactive approach to control costs, which involves strategic planning, ongoing monitoring, and implementing cost-saving measures. Carefully managing expenses ensures the sustainability of your self-funded plan, allowing you to provide affordable healthcare benefits for your employees at a lower cost.
But don’t worry – you’re not in this alone. By working with your Roundstone Relationship Manager, your advisor, and your Third-Party Administrator (TPA), you’re provided with an expense management strategy that simplifies the process. Roundstone’s team of relationship managers, clinicians, and cost containment specialists help guide you through the process, every step of the way.
What Are the Funding Options for Self-Insurance?
Selecting the right funding option when you choose to self-insure is crucial — it directly impacts the financial stability and success of your plan. Employers must assess their group’s circumstances and work one-on-one with advisors to determine the most suitable funding approach for their companies.
Funding Options for New Employers
Depending on the TPA you choose, you may have access to multiple funding options to align with your financial goals, risk tolerance, and cash flow capabilities. The beauty of self-funded insurance is its flexibility. Options such as Pay as You Go, Funding to Max, or Funding to Expected can provide flexibility and stability in funding arrangements, allowing employers to optimize their budgeting and financial management strategies.
- Pay as You Go: You pay for healthcare claims as they occur, eliminating the need for upfront funding. This option provides cash flow advantages and allows you to pay only for services used by your employees. With Pay as You Go, monitoring claims is crucial to ensure sufficient funds to cover all claims.
- Funding to Max: You set a maximum budget for healthcare expenses and allocate funds accordingly. If claims reach the maximum limit, stop-loss insurance provides financial protection. Funding to Max offers predictability in budgeting and safeguards employers from catastrophic claims. It mimics the experience of being fully insured.
- Funding to Expected: With this approach, you estimate claims expenses based on historical data and actuarial projections and fund your plan accordingly. If actual claims exceed expectations, stop-loss insurance fills the gap. Funding to Expected enhances budget stability and helps prepare for anticipated healthcare costs through careful analysis.
Maintaining an Escrow Account
Escrow accounts are an important aspect of self-funded health insurance. The escrow account serves as a pass-through account for claims payments and the employer and employee portions.
With self-funding, companies need to avoid commingling funds and keep them identifiable to ensure proper handling and accounting. This ensures transparency, accurate claims payments, and compliance with financial regulations.
Maintaining a Surplus for Future Use
Being conservative in the first year of self-funding is a good idea — it allows employers to anticipate potential cost fluctuations. When transitioning from a fully insured model to self-funding, take a cautious approach to estimate costs and expenses.
Being conservative means erring on the side of caution by slightly overestimating projected expenses. This helps to avoid unexpected financial burdens or shortfalls in the initial stages of self-funding.
Surplus as a Buffer for Future Use in a Self-Funded Insurance Plan
In the first year of self-insurance, it’s common for employers to accumulate a surplus in their self-funded plan. This surplus arises when the actual claims and expenses incurred by employees are lower than initially projected. Retaining this surplus as a financial buffer for future use is important. It can offset higher costs in subsequent years or mitigate any unforeseen increases in healthcare expenses.
Eliminating Volatility in Cost Share
The surplus accumulated in the self-funded insurance plan can help stabilize the cost share for employees. By retaining the surplus, employers can avoid passing on sudden increases in healthcare costs to employees through higher deductibles or premiums. The surplus acts as a cushion, allowing you to maintain a consistent cost-sharing arrangement with employees and provide greater financial predictability and stability.
Deductibles for Self-Funded Health Insurance Plans
The specific deductible is the dollar amount that an employer’s plan must pay before the specific stop-loss policy will reimburse additional expenses.
Deductibles play a significant role in self-funded health plans, and their specific amounts vary based on the employee group size — there is no one-size-fits-all approach.
The deductible for each group is determined by factors such as the number of employees covered under the self-funded health insurance plan. Smaller groups, typically with 30 to 50 employees, may have lower deductibles, such as $20,000 or $30,000.
Larger groups with 200 or more employees may have higher deductibles, such as $150,000 or $200,000. These varying deductibles reflect the unique risk profiles and healthcare needs of different group sizes within the self-insured model.
How Roundstone Gets Paid: What Makes Us Different
Roundstone charges a captive management fee for its services. This fee is disclosed in the participation agreement that all captive members sign. However, Roundstone does not retain the profits generated by the captive; instead, they go to the members in the form of annual distribution checks.
In 2022, Roundstone distributed $24.4M unspent captive premium pro rata.
Here’s what makes Roundstone different and sets us apart in the world of self-funded insurance: We demonstrate a commitment to fairness and objectivity in our fee structure by aligning our financial interests with those of our members.
We also negotiate policy issuing and excess reinsurance costs for the captive and actively seek the best rates in the market. We collaborate with the incumbent advisors and present them with competitive rates, allowing them to retain the business. This demonstrates our dedication to securing favorable terms and cost savings for our captive members.
Explore the Benefits of a Self-Funded Employee Health Plan With Roundstone
Effective budgeting is vital to the success of self-funded health plans. To learn more, read the other blogs in our Three Easy Pieces Series, or watch the on-demand webinars.
If you’re ready to talk about your own self-funded health plan, contact a Roundstone Advisor today. Our team will help you take the next step toward maximizing the benefits of self-funding so you can provide affordable health insurance for your employees — at less cost to you.
