The three major advantages of self-funding are: improved cash flow, cost savings, and increased control.
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Improved Cash Flow |
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Employers improve cash flow when money formerly prepaid to the insurance company and held in the form of various reserves (such as unreported and pending claims) is freed for use by the employer. Self-funded plans only pay administrative fees and stop-loss premiums in advance. Claims are funded by the employer as they are paid by the administrator, typically 30-90 days after medical care is received. |
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Cost Savings |
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Fixed costs of a self-funded plan are normally less than those of a conventional fully-insured plan. Savings result from:
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Interest income is earned and retained by the employer.
The employer usually holds reserves in an interest-bearing trust account to pay for claims that have been incurred, but not paid. This allows the employer full usage of working capital and interest earnings on any monies in the account.
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Elimination of most State Premium Taxes.
In most states there is no premium tax for the self-funded plans (usually 2-3% of monthly insurance premiums). Only the stop-loss insurance is subject to the premium tax, which is a fraction of the fully-insured premium.
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Lower Administrative Overhead.
Generally a TPA’s administrative costs are much lower than a traditional insurance carrier because they do no have the overhead of a large corporate structure.
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Elimination of Carrier Profit Margin, Contingency Reserves, and Risk Charges:
The profit margin, contingency reserves, and risk charges of an insurance carrier are eliminated for the majority of the plan.
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Retain reserves when the Plan has a good year.
An employer saves money when his plan’s claims experience is better than expected. Their experience is only based on their own population, and not pooled with other employers, who may have poor claims experience. At the same time, the employer is protected (stop-loss) in the event that the plan’s expenses are greater than expected.
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Increased Control |
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Plan Design Flexibility.
Under ERISA, self-funded plans are exempt from state regulation. Therefore, an employer may establish uniform benefits for employees in different states, eliminating the need to comply with state mandates, taxes, and assessment. Furthermore, an employer has the flexibility to determine the appropriate plan design that will meet his own needs, and the plan can be amended at any time to eliminate abuses, if they are encountered.
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Service Flexibility.
In a self-funded plan, the employer has increased PPO network and Pharmacy Benefit Manager (PBM) choices, in addition to various other vendors. Additionally, Health Management strategy can be tailored to meet the unique goals of each client.
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Risk Management Effectiveness.
The employer may choose the amount of risk he wants to take, and the appropriate level of stop-loss coverage. Fully insured plans have set pooling levels allowing little flexibility.
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Claim Cost and Utilization Controls.
As a TPA, EPOCH offers a number of cost management solutions such as predictive claims modeling, large case management, regional and national PPOs, Rx management, and other programs through a variety of sources rather than an employer being able to use only the insurance company's in-house programs.
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Summary
As health care costs continue to rise, employers are looking for ways to control costs while maintaining employee satisfaction. In a fully-insured environment an employer pays an insurance company to provide benefits and pay claims for its employees. The employer must choose from that particular carrier’s products, providing very little flexibility to design a plan that will meet the specific needs of the employer’s employees. If the employer does experience a good claims year and there is any profit left over - the difference between premiums paid and claims covered - the insurance company keeps it.
As a TPA, EPOCH’s focus is on providing the best, most efficient plan administration possible to each of our clients on an individual basis. We invest in our people and our administrative processes in order to deliver personalized service at the lowest cost. As healthcare prices rise, EPOCH works with employers to find a balance between cost control and employee satisfaction. With self-funding, employers improve their cash flow, take control of their health benefits, and achieve greater cost savings.
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