What to Consider When Moving from Fully Insured to Self Funded Insurance

Making the move from fully insured to self funded health insurance may allow a business to save money, enjoy greater flexibility and assume more control over its health care plan. When the transition is smooth, employees may hardly realize a shift is happening. But for the business leaders working behind the scenes, moving from fully insured to self funded can take months of careful planning and strategizing. 

Becoming a self-insured employer can be a complex process. Anticipating some of the new challenges that might come up during the transition allows a self-insured employer to navigate those challenges with minimal stress. Some of the questions to consider when moving from fully insured to self funded include: 

What benefits do our employees really value? Moving to self funding allows a business to customize its benefits to the specific needs and wants of its population. Maximizing this opportunity requires the employer to understand exactly how its covered population uses their benefits, and what kind of benefits will best serve them in the future. Because offering competitive benefits is a key way of attracting the top talent, businesses preparing to make the switch to self funding should be thinking about how to design a plan that will entice top job candidates

How will self funding work for us long-term? Choosing this insurance model may help a self-insured employer align its benefits with its long-term goals. It’s useful to think about how your employee population might change in the coming years. Will the workforce be comprised largely of young workers (who tend to have lower medical expenses), or will the business need to rely more on older employees with specialized experience (and higher medical costs)? How will the business ensure that it maintains adequate cash flow to pay for claims as they arise?  

What tax and compliance issues should we anticipate? One advantage of moving from fully insured to self funded is the potential tax savings. In Massachusetts, insurers pay a 2.28 percent tax on premiums they collect, and recoup those expenses by charging employers more for premiums and services. 

Self-insured employers aren’t subject to that premium tax. They’re also free from some of the state-specific compliance requirements that affect fully-funded plans. 

But employers that switch to self funding still have both tax and compliance responsibilities, and it’s important to be aware of them before finalizing any changes. Self funded plans are governed by the Employee Retirement Income Security Act. Between ERISA and IRS requirements, self-insured employers should be talking to their third party administrators, accountants and legal advisors to prepare for a smooth transition to self funding. And because self-insured employers own their own claims data, it may be advisable for these businesses to brush up on HIPAA compliance and data security best practices before moving from fully funded to self funded plans. Having access to all that sensitive data may spur self-insured employers to put additional protections in place.

How will we cover high-cost claims? The potential to save on health care costs is a key reason that businesses consider moving from fully insured to self funded plans. Because a self-insured employer only pays for its covered members’ real claims, an employer whose employees stay mostly healthy in any given policy year may spend less on health coverage than it would have spent on premiums for a fully funded plan. Pairing this kind of health plan with a stop loss policy allows a self-insured employer to cap its risk. With this kind of protection in place, any high-cost claims that exceed a predetermined level are reimbursed by the stop loss carrier. 

How will our plan document and stop loss policy function together? Part of moving from fully insured to self funded involves creating a plan document, which ERISA makes a requirement for most self-insured employers. The plan document should summarize the plan’s benefits and spell out all the provisions that covered individuals need to know. An employer’s stop loss policy is separate from its self funded plan, and sometimes this policy will conflict with the provisions laid out in the plan document. If the plan document says that a certain type of claim is covered but the stop loss policy doesn’t agree, the employer may have to cover the full cost of that claim without stop loss reimbursement. Making sure the plan document mirrors the stop loss policy allows a self-insured employer to create consistency between the two, hopefully avoiding expensive coverage gaps. 

Like other decisions that business leaders need to make around benefits, moving from fully insured to self funded health insurance requires careful consideration. Whether transitioning to a self funded plan is advisable for any given organization really depends on its specific financial situation and the needs of its workforce. 

If moving from fully insured to self funded might be the right decision for your business, Stop Loss Insurance Brokers, Inc. is here to help. What questions do you have around self funding and stop loss? Contact us today!

Denise Doyle  Denise Doyle is the President of Stop Loss Insurance Brokers, Inc. She has over 30 years of experience in the industry and is a member of Self Insurance Institute of America.

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