- Posted by Chris Elvidge
- On October 20, 2020
As we continue to navigate our way through the COVID-19 pandemic and economic downturn, business executives and management teams are pressed to devise strategies that protect their business’ cash flow. Unfortunately, many organizations are facing constraints on cash and employees are concerned as the response to these economic pressures can and have resulted in furloughs and layoffs.
One strategy that organizations should consider as they try to manage cash flow in these challenging times is moving from a fully funded (fully insured) plan to a partially or self-funded platform. In a self-funded health plan, employers assume part of the financial risk for providing health care benefits to employees and purchase stop loss insurance (premium) to protect against catastrophic losses. Organizations working in this funding environment could pay medical costs as they incur them or could model the payment plan to a ‘level-funded’ equivalent throughout the year similar to a fully insured ‘fixed’ premium that is paid to health insurance carriers. By this method of funding a medical plan an employer avoids the cost of claim reserves, retention to cover the carrier’s administrative costs, profit margin, risk charges, premium taxes and contingency margin, which are all included in a fully insured premium on top of the costs of expected claims. Today, these reserves and retention charges can range from 10% to 30% of fully insured health premiums a client would pay and could not recover. A self-funded platform also affords flexibility and customization to the plan design, transparency with claims and reporting, and the ability to use analytics to model opportunities at improving claims and utilization spending.
Previously, self-funding was typically only afforded to large organizations who had enough employee volume to be credible and counterbalance the risk of a poor claims year.
More recently, creative new plans and platforms have created opportunities to bring the self-funding experience downstream to the small to mid-market sized employer. Captives and consortiums have created opportunity for smaller employers to join together to create cash flow and reserves in a way that the fully insured carrier world could (and would) not.
Most of these self-funding platform environments also offer a multitude of provider networks, creating convenient and expansive national access to the major carriers that currently are in the fully insured mix. In many cases, the conversion to self-insurance is transparent and unnoticeable to employees.
Of course, the disclaimer is that partial or full self-insured funding may not be the right fit for all groups based on your current plans, rates, industry, or general risk aversion. However, as organizations continue to work through how to survive this economic downturn, and more importantly gain control of their health care spend, evaluating a self-funded plan could help you not only offer competitive employee benefits, but also help manage significant cash flow.