Why Small Businesses are Moving Toward Self-Funding Plans

Small businesses have to be creative to survive in a competitive market. For many of these businesses, embracing a new kind of healthcare strategy is key to controlling costs and attracting top talent. Self-funding your healthcare plan means paying employees’ claims directly instead of paying premiums to an insurance carrier. It’s not actually a new strategy, but it hasn’t always been considered a viable option for small businesses. Self-funding has generally been the domain of large corporations, which could draw from large cash reserves to pay for claims and spread any risk across a large employee pool. 

But today, self-funding is officially a mainstream healthcare choice for businesses of all sizes. According to research from the Kaiser Family Foundation, 67 percent of all covered workers in the U.S. were covered by at least one self-funded plan in 2020, up from 61 percent last year. Of workers in small firms (fewer than 200 employees), 23 percent received coverage from a self-funded plan, an increase from 17percent in 2019. 

Does it make sense for your workers to be part of that 23 percent? Maybe. Like all healthcare decisions you have to make for your small business, choosing self-funding isn’t something to take lightly. Before you make any moves, consider all the reasons why so many other small business owners have moved toward self-funding in recent years. 

Self-Funding Eliminates Some Insurance Costs 

With a traditional fully-funded health plan, some of your costs ultimately become an insurer’s profits. Self-funding allows you to keep that cash for yourself, and avoid some of the other fees and taxes that employers with fully-funded plans pay. You’ll still be responsible for administrative fees, but these will be a fixed expense that you can plan for in advance. 

Self-Funding Can Improve Cash Flow

Protecting cash flow is critical for small businesses that don’t have access to huge cash reserves. Because self-funding allows you to only pay for real claims, if your employees stay relatively healthy there may be periods when your claim costs are lower than you anticipated. That frees up more money that you can use to grow your business or invest to fund your future healthcare costs. 

Self Funding May Result in Healthcare Savings 

Without the help of a crystal ball, there’s no way to say for sure whether choosing self-funding over a fully-funded plan will help a small business save money over the course of a year. It’s possible that your employees will incur higher claims than you anticipated—and it’s also possible that you’ll spend less on healthcare in the first year you switch to self-funding than you spent in previous years.

Remember that choosing self-funding doesn’t mean you’re vulnerable to large and unpredictable costs. Businesses that use this strategy typically also buy stop-loss coverage, which puts a cap on the amount that they’ll have to pay for claims. If someone you cover has a serious health event that results in a million-dollar claim, your stop-loss coverage will pay for costs above a certain predetermined amount. This feature allows a small business to more accurately budget for its expected healthcare costs; you won’t have to factor in the possibility of having to cover high-dollar claims

Plus, because you’ll own your plan, you’ll have access to data that lets you tweak the plan in subsequent years to trim wasteful spending. 

Self-Funding Can Be Used to Tailor Coverage to a Small Group’s Needs

Customization is a major selling point for self funding. Unlike with fully-funded insurance, in which you may have to pick from just a few pre-designed plans, self funding allows you to tailor your plan. You can choose not to pay for benefits that won’t get used, and to cover the things that your employees most want covered. 

Considering how much weight employees put on benefits when deciding where to work, having a plan that your workers like is critical for hiring and keeping the best people. For small businesses in competitive markets, offering high-quality healthcare is one of the single most effective ways you can attract top candidates.

By the way, being able to customize your plan doesn’t mean you’ll have to become a benefits expert in your free time! When your small business chooses this strategy, you’ll work with an administrator to design a plan that balances your needs with your risk tolerance. You’ll have plenty of input but can rely on the guidance of an experienced benefits administrator when making decisions.  

Self-funding is the right choice for many small businesses, but not all. It’s critical that small business owners understand the risks and benefits of choosing self funding. I know that making the right healthcare decisions for your small business can seem overwhelming, which is why I want to encourage you to reach out to me if I can be of any help. Contact me today!



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



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