Approximately 70% of American homes are owner occupied for several core reasons: It allows the owner to build equity, provides the freedom to personalize as desired and offers certain tax advantages. These explanations also apply to self-funded versus fully insured health insurance.
“Fully insured” is analogous to renting—an insurance “easy button” that provides business owners with an aggregated rate for all costs: provider claims, taxes, insurance, administration and profit. As with renting a house, the renter does not have any visibility into each specific line-item expense, nor do they have any control over each component cost. Because the landlord provides an all-inclusive cost, it can be difficult to ascertain the profit margin being earned.
At renewal time for a fully insured plan, the employer has two options: Pay the premium or change insurance carriers. Brokers get competing quotes and try to convince the insurance “landlord” (i.e., the carrier) that the price being quoted at renewal is too high. However, carriers know that employees don’t want to change their doctors (provider network), and that switching costs are high, so the employer usually settles for an increase in the premium paid.
A self-funded, or more specifically “level-funded,” plan is like owning a home. Instead of a single amount paid to a landlord, each component of the plan is disclosed and negotiated, providing employers with the ability to customize their plan, reduce costs and potentially apply excess funds toward future benefits.
Construction contractors often employ young, healthy, male populations who are low utilizers of medical benefits, which further creates an incentive to level-fund. As a plan incurs fewer medical claims relative to actuarial expectations for the population at large, more money remains in reserves for future claims, increasing benefits or reducing premium costs.
The core components of a level-funded plan include fixed costs, provider claims costs and reserves. To the employee, self-funded and fully insured plans operate identically. The difference is solely from an employer perspective, as both funding methodologies have provider networks, member services and pay provider claims.
But the business owner can achieve savings with a level-funded plan because of the unbundling and transparency of the following items.
Fixed Costs: Administration fees (ID cards, claims payment, member support, etc.), provider network access, stop-loss (reinsurance) premiums and broker/consultant fees.
Monthly Claims Costs: These vary based on the amount of claims incurred each month. The employer pre-funds the claims payment up to the stop-loss maximum liability.
Reserves: Funds that have been contributed to the plan in the past and are available to be spent by the plan for valid member claims. Think of this as an escrow account to hold funds until needed by the plan.
The number of current employees is key for determining if a level-funded plan might be appropriate for a company. The larger the population of health plan participants, the less variance will occur in utilization of medical care and the bigger the impact from a savings perspective.
Employers typically realize annual savings of 2% to 3% from reduced taxes and an additional 3% to 5% from reduced insurance company profits, relative to fully insured plans.
Employers also gain from the detailed claims reporting self-funded administrators provide in order to enhance control of the plan. Finally, employees are more likely to wisely utilize their health plan if rewarded with a stake in the plan’s financial success (e.g., using urgent care instead of an emergency room).
In conclusion, businesses with more than 25 employees should consider buying health insurance instead of renting it.
