Still Fully-Insured? A Growing Business’ Pathway to Self-Funding
Most businesses begin their employee benefit journey fully-insured for good reason. Early in a business’ growth cycle, it’s highly advantageous to keep monthly healthcare expenses predictable and under control, with any variation squarely the carrier’s problem.
However, once a business has grown past that developmental stage and stabilized with a properly scaled workforce and projections of continued success, self-funding becomes increasingly attractive. When businesses self-fund, they gain more granular access to their bottom-line healthcare expenses and can potentially save money in the long term by assuming increased benefit management responsibilities and opening themselves up to a little more risk.
Moving forward, we’ll explore:
• Why growing businesses should transition toward self-funding
• First steps for businesses looking to self-fund
• Important planning considerations for organizations hoping to self-fund
• The advantages and disadvantages of level funding
Why Transition Toward Self-Funding?
Shifting toward a self-funded benefits program is a major decision for any organization and not something that can be accomplished without a great deal of planning and follow-through. While the process may sound daunting for HR and finance leaders accustomed to fully-insured processes, there are tangible benefits available for those brave and organized enough to make self-funding a priority.
Leveraging Your Business’ Stability to Reduce Overspend
Self-funding uses organizational size and stability to reduce average monthly costs, as the employer significantly lowers overhead by paying a variable monthly fee based directly on employee claims (healthcare usage).
While there are increased internal management responsibilities for benefits professionals on the HR team in self-funded scenarios, there are also significant gains, as organizations reduce administrative fees and take power back from carriers when it comes to dictating monthly costs. That kind of overspend reduction can help tighten up an employee compensation budget for HR departments looking to stay streamlined for company growth, even if headcount begins to rise.
Businesses don’t need to be large to benefit from self-funding, either. In the right scenarios, self-funding is possible at almost any scale, as long as the employer truly understands what their employees need and will use in terms of healthcare.
Why Variable Cost can be Preferable to Fixed Premiums
Many risk-averse planners might be tempted to stick with the predictability of fixed-rate, fully-insured plans because the number you know is much less daunting than a worst-case-scenario figure. However, stop-loss and excess-loss coverage are specifically available to limit the financial blow of catastrophic claims scenarios, which means that a month of coverage for a healthy workforce could, in many situations, be significantly cheaper than a month at the fully-insured rate.
Furthermore, if the employer maintains a healthy workforce where daily wellness and preventative medicine are values and priorities, expensive trips to the emergency room and invasive procedures are minimized through plan design and education. That means self-funded companies can exponentially increase their benefit if they establish a (or take advantage of an existing) meaningful culture of wellness.
Leveraging a self-funded plan might seem like a risky and costly expense, but it’s actually a long-term investment in the company’s ability to grow and work better. In the same way, the potentially increased cost of self-funded insurance is mitigated by the opportunity to reduce inefficiencies and overspend in most cases.
Providing Exactly What Your Employees Need
Of course, in any conversation about employee benefits, the benefit of the employees needs to be a central focus. Working for a company with self-funded insurance is beneficial to team members throughout the organization, as the savings from reduced administrated costs can be passed down from the employer to individual policy-holders.
Additionally, self-funding means the employer has more specific control over benefit offerings and, with a strong understanding of employee needs, can design plans in a more thoughtful, specific, and employee-focused way than ever before. Of course, businesses can only achieve that if they have a rich, detailed knowledge of their employees’ and their families’ medical needs, claims-related behaviors, and emerging trends and technology that connect employees with medicine and medical professionals in innovative and cost-effective ways.
Maximizing a self-funding transition requires incredible preparation and a robust base of knowledge about both plan design generally and each individual organization’s specific finance picture, needs, and goals.
Preparing to Self-Fund
Achieving self-funding is a journey unto itself that forces HR and finance to work together to establish the best-possible understanding of needs, possible solutions, and the impact of each on the bottom line.
The Importance of Preparation
In short, if a self-funded employee benefits program is not designed and scaled correctly, it can significantly harm the company’s ability to maximize profitability. On the other hand, though, getting self-funding right opens the door to a variety of gains for both the business and its employees. The difference between those two outcomes is good planning.
Altering a benefit funding model is a paradigm shift that no one professional or department can make happen on their own. Cross-department planning and collaboration must occur in order for all relevant decision-makers to get a full picture of current healthcare costs, the possible impact of transitioning toward self-funding, how benefit offerings will change, etc. That means input from HR, finance, the boardroom, and beyond is necessary to plan for a strong, positive transition.
When HR, finance, and senior leadership have a shared understanding of how self-funding will reduce overspend without tying the company’s hands in a way that impacts profitability, then the real design work starts.
Understanding and Planning for Risks
One of the reasons self-funding is such a cost-saver is because, in self-funding, a business assumes a great deal more variable risk. In a fully-funded scenario, a catastrophic accident or life-changing diagnosis to an employee impacts a company’s healthcare fees very minimally – that security is part of what businesses pay for. Once a business is self-funded, however, a major uptick in claims or a string of big-ticket claims can certainly eat into profitability for the month or quarter.
Minimizing those risks requires researching stop-loss and excess-loss coverage and determining how that coverage should be scaled to your workforce and its needs to provide the business with the profitability protection it requires. Reducing the risk of such high-cost events from occurring through employee health and wellness offerings (which are significantly cheaper than the cost of reactive medical care) is another crucial proactive planning measure.
Maximizing the Data Available to You
Designing a self-funded plan requires a rich understanding of the benefits and services employees absolutely need. By studying the healthcare utilization data available through their providers, HR leaders and CFOs can get a very clear, specific understanding of what kind of services employees are using regularly and what their actual costs are.
That data is incredibly valuable in planning what a standard “month” of real expenses in a self-funded scenario might look like compared to current fully-funded costs. Again, the transition toward self-funding cannot be made or even attempted until that data story is fully understood, or else the company is simply self-funding for the sake of self-funding, rather than making an educated, profit-minded decision to improve healthcare efficiency.
Scaling Your Benefit Plans to Your Funding Goals
Once a commitment to self-funding has been made and HR and finance have worked together to understand how the transition will support company growth and translate to more efficient spending, the next step is to think about how the change in funding model will affect specific benefits offerings.
To be blunt, plan design is more important than ever for HR to ensure self-funding is efficient at scale and supports growth. Armed with utilization data and other measures of employee need such as surveys, internal leadership must work with a benefits broker who understands the transition plan and the importance of plan success in order to create benefits packages that are highly valuable to team members while remaining mindful of the bottom line.
To guarantee success, no HR leader or department should be working on their own during this period. Input from leadership, finance, and your benefits broker can be incredibly useful to ensure proper perspective is maintained and the transition plan is well-aligned with short- and long-term company goals.
Meeting in the Middle: What about Level Funding?
Some organizations looking to transition away from a fully-funded approach without completely losing their safety net may be interested in what is known as “level funding.” Level funding provides a middle ground between fully- and self-funded benefits programs, in which the carrier and the employer share responsibility.
What is Level Funding?
In a level funding scenario, an organization pays a set monthly fee to an insurance carrier, as in traditional fully-funded plans. However, the carrier tracks actual employee usage and claims throughout the year so that at year’s end, the difference between the actual claims and the monthly fees can be determined.
If the employer organization’s monthly spending equals more than the total of the claims at the end of the year, they are reimbursed the difference. However, if the value of the claims is greater than the amount the employer paid in, they must pay the carrier the difference.
Level funding can be highly beneficial for businesses who understand their utilization picture extremely well and can predict with great certainty that they will be will not stray an acceptable percentage from the projected payments. On the other hand, if an organization goes into a level funding situation without truly understanding their employees’ needs, it can lead to an additional payment at year’s end.
In short, level funding protects businesses from many of the administrative challenges of self-funding but doesn’t carry the same cost-saving benefits as a well-planned, well-executed self-funded approach.
Key Takeaways
The transition from fully-funded insurance offerings toward a self-funded program is one of the biggest and most important adjustments an HR department can oversee. Pulled off successfully, a self-funding initiative can streamline healthcare costs while keeping the entire team productive and well-supported. Scaled, planned for, or executed incorrectly, however, self-funding attempts can put a major strain on a business’ month-to-month profitability.
If you’re an HR professional or finance leader starting to consider whether your organization is ready to begin the journey toward self-funding, remember:
• Self-funding is a great way to reduce healthcare overspend by embracing variable fees month to month
• In a self-funded model, employer healthcare costs are based on actual usage, not projections
• Transitioning toward self-funding is a crucial shift that requires organization-wide commitment and extensive planning
o Healthcare utilization data can be valuable in this work
o Understanding risks and connecting with the coverage needed to mitigate them is crucial
• Partnership with finance is necessary to ensure benefits offerings are scaled with company capabilities and objectives
• Level funding offers a blend between self- and fully-funded approaches that eliminates both the best- and worst-case scenarios for self-funding failure/success
• Working with the right employee benefits broker can help your business smoothly transition to a self-funded strategy
