The ABCs of Self-Funding Your Health Plan

Small and midsize employers continue to struggle to manage their ever-increasing health plan costs. Since 2005, the average family’s premium has increased 61%, and the upward trend will almost surely continue. Employers’ choices are shifting more costs to workers, bearing the increasing costs themselves, or a mix of the two.

Faced with this challenge, CFOs of midsized and smaller companies are increasingly looking to implement best practices that historically have been prevalent only at the largest companies. One such practice is moving from an insured health plan to a partially or fully self-insured one. This article outlines that general principles of self-funding for small and midsize employers, addresses potential challenges employers might face, and provides tips to help CFOs assess self-funding.

Self-Funding in a Nutshell

In a traditional medical plan insurance contract, the employer pays predetermined rates (premiums) to the insurance carrier, and in exchange the insurance carrier takes on all claims risk for one year. In a self-insured arrangement, the employer, as plan sponsor, hires a company to administer the plan, but the administrator draws on the employer’s general assets to pay the doctors and hospitals.

Under a self-funded arrangement, there is tremendous risk to the employer of a member having a large claim. To mitigate this risk, the employer typically purchases stop-loss insurance.