A self-funded health plan is one in which the employer assumes some or all of the risk for providing health care benefits to their employees. The employer takes control of the assets of the plan, invests them to his advantage and eliminates the insurance company charges. Employers can completely redesign the plan to meet employee needs.
An employer does not pay full state premium taxes, which usually range from 4%-6% of the monthly insurance premium. Every state taxes insurance companies on the premiums collected. The insurance company in turn pass these costs back to the employer. In a self-funded plan, premiums are collected only on the excess loss coverage - a fraction of the regular insured premium. Therefore, premium taxes are substantially reduced.
In a self-funded plan, employers do not pay insurance company risk and retention charges. An insurance company charges several fees to insure and administer a health plan. Many of these, such as booklet printing costs or actuarial fees, must be paid no matter how the plan is funded or who administers it. However, some insurance company charges, such as risk and retention charges, are not applicable to self-funded plans. They simply do not exist in a self-funded situation.
The employer retains control over the health plan reserves, enabling maximization of interest income. When the employer decides to self-fund and all claims have been paid under the old insurance contract, the employer recaptures any reserves that are left. Usually the employer then invests this money and receives the interest income. Insurance companies traditionally credit an employer much less than the actual interest/income received from that employer's reserves. The difference between what the insurance companies credit an employer and what that employer can earn by their own investments is another advantage of self-funding.
HOW DOES IT WORK?
With self-funded insurance, each company determines their desired funding amount, using an insured stop-loss limit to control costs. If claims climb above that limit, your insurance picks up the difference. Unbundling allows you to design your own health care benefits and to get competitive bids on each of the elements, further reducing company costs. This funding arrangement gives you savings and cash flow alternatives.
In addition to these cost savings, with self-funded insurance your company holds its own claims reserves, which earn interest. If you have a good claims year, there's no middleman, so the savings are yours to keep. If, on the other hand, annual claims are high, you only pay up to your stop-loss limit and your insurer picks up the rest.