Don’t leave money on the table: how small employers can save with self-funding

Niels Heemskerk discusses captive insurance

When it comes to self-insurance, the question isn’t should employers self-fund their health plan—it’s why haven’t they already? Self-funding is one of the most effective ways employers can gain control over their healthcare spend and provide better benefits to their employees.

But not everyone is comfortable with the risks associated with self-funding. That’s where captive insurance (sometimes known as captives) comes in. Captive insurance plans can accommodate self-funded options for employers with as few as 50 employees on the plan. If an employer has more than 150 employees on the plan and several years of good loss-ratios, it’s hard to think of a reason not to self-fund. If their medical loss ratio minus high claimants is consistently greater than 90% (assuming they can get that data from their health insurance carrier), that’s one of the few times it makes sense to stay fully-insured.

The percent of large employers who self-fund their plans rose dramatically between 1999 and 2018. But this number stayed relatively flat when it comes to mid-sized employers. It’s not that self-funding makes less financial sense for mid-sized employers, it’s that they have not been told, and therefore don’t yet understand, the long-term risk and reward of self-funding.

With self-funding, an employer pays an administrative fee to have an insurer or TPA (third party administrator) administer their health plan (deal with providers, claims, etc.) and a premium for stop-loss insurance to protect them against large claims costs.

The big difference is employers pay their own claims—meaning they get to see every claim and know exactly where every dollar is going when it comes to their healthcare spend. And they no longer pay the hefty margin above claims costs that carriers bake into their fully-insured premium. Over a multi-year period, the savings are significant.

One of the biggest myths in health insurance.

Typically, employer health plans experience one year out of every five where claims are abnormally high. Many employers are under the impression that a fully-insured plan is less risky because the carrier will absorb or pool these high claims and cushion the employer. This is one of the biggest myths in health insurance.

The carriers do not “absorb” these costs; they recoup them by raising premiums the next year—sometimes by 30% to 50%. The employer is cushioned from the high claims costs only in the year they are paid. They get hit with them the following year in the form of a premium increase. When claims costs come down, though fully-insured premiums rarely do, rate increases are based on the new, higher baseline premiums.

With a self-funded health plan, the employer will pay a portion of the additional costs during a high-claims year and stop-loss insurance will cover the rest. When claims costs come down in following years, so will the employer’s costs. The stop-loss premium may increase, but nowhere near as dramatically as a fully insured premium would have. The employer retains the margins above claims costs rather than giving that money to the fully insured carrier.

Added stability and control.

Self-funding in a captive insurance program provides an extra level of protection against volatility and premium increases. The risk pooling solution dampens the volatility of claims costs during the high-claims years and even enables employers to get a portion of the stop-loss premium returned in good years. In addition, as members of the captive, employers have group purchasing power when negotiating stop-loss renewals, which helps to lower insurance premium increases.

Self-funding in the captive plan also enables employers to take advantage of insurance claims reduction programs. Some captive insurance plans provide the following: leading population health analytics and predictive modeling to drive effective disease management programs, a cost-effective, transparent Pharmacy Benefits Manager and an innovative specialty drug program to rein in spiraling drug costs.

Captive programs make it easy and effective for mid-sized employers to enjoy the same benefits of self-funded insurance as large organizations. Employers have saved hundreds of thousands—sometimes millions—of insurance dollars over the years by self-funding in captive programs. That’s money that can be reinvested in better health benefits for the employees.

Hear more about captives during Maestro Health’s webinar, “Breaking the stereotype: Why self-funded captives are here to stay,” on Tuesday, August 6 at 1 PM CT. I’ll be joining Richard Armstrong of Springbuk and Scott Bennett of Maestro Health for a great conversation on what to look out for when building a captive strategy. Register here.