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Small employers looking for ways to control their group health insurance costs are more closely examining what it means to be “fully insured.” These days, employers with as few as 10 full-time employees are exploring other funding arrangements which can allow them more control—or at least more accountability—over their annual premium increases.
“Fully insured” is what most people mean by “insurance” or group health insurance. The individual, or their employer, pays a premium to the insurance carrier; in return, the insurance carrier is responsible for paying future medical claims that are:
The financial risk for future medical claims, then, is almost entirely with the insurance carrier. Beyond that out-of-pocket maximum—for instance, $5,000—it doesn’t matter whether an individual incurs a $13,000 appendectomy or $300,000 respiratory failure, or a combination of medical procedures in a given year; the insurance carrier has contracted to pay all claims and not charge any more for monthly premiums during the term of the contract (typically at least one year).
Because an insurance carrier must obey simple math in order to function, it needs to bring in at least as much in premiums as it costs to pay the incurred medical claims (and the employees of the insurance carrier often want to take home paychecks, too).
If the cost of providing medical services increases—or, by actuarial calculation, is likely to increase—insurance carriers will often offer individuals or employers increased premium rates at the beginning of their next contract year. These individuals or employers are then free to accept the new premium rates or shop around with other insurance carriers.
Regardless of whether the individuals or the company stays with the same insurance carrier, the medical claims already incurred are the insurance carrier’s responsibility to pay.
The idea of “pooling” has always been a part of fully insured coverage as well. In simple terms, if 10 people are insured, the insurance carrier’s goal is to make sure that the premium collected from all 10 covers the claims incurred by all 10, not necessarily that the premium collected from each individual covers that individual’s claims.
The benefit of community rating is that individuals and companies with a large number of health conditions can find insurance coverage that is not priced completely out of their range. However, small employers with few health risks are finding the following occurs:
Self-funded insurance is almost the complete opposite of full-insured coverage. A self-funded insurance plan is exactly what it says: a company that provides all the funds to pay for expected claims (with an important caveat—see Reinsurance/Stop-Loss below).
The employer forms an “insurance pool” with the participants consisting only of their employees.
Because even larger groups can incur greater than expected claims, most self-funded insurance plans still have a form of insurance in place, alternately called “reinsurance” or “stop-loss insurance,” which means the employers:
Typically, even employers with several thousand employees will have stop-loss to hedge their bets against the unexpected—which is really the purpose of insurance.
Self-funding is generally NOT an option for small employers due to the nature of statistics.
For example, if you have five employees that are funding healthcare expenses to expected levels, it only takes one high-risk claim to exceed planned expenses significantly. Therefore, it is very much in the interest of a self-funded insurance plan to minimize claims, as all costs come out of the company’s pockets—and conversely, all savings benefit the company’s bottom line.
Thus, wellness programs, biometric screenings, in-house exercise programs and smoking cessation incentives can often be found at these companies, supplied and encouraged by well-motivated management.
Self-funded insurance plans are often set up with the assistance of professional actuaries and third-party administrators (TPAs), who can:
Level-funding has recently attracted more attention among larger, small employers (nearing 50 full-time employees) or smaller, large employers. At its simplest, level-funding is self-funding done small, usually by an office or offshoot of a fully-funded insurance carrier.
Because self-funded and level-funded plans for small groups don’t need to be community-rated like fully insured plans, they can cost less to provide health benefits and save the company money, but only if the cost of claims remains low. Only companies with healthy individuals should consider level-funding.
As always, insurance is a balance between costs and risks.
There is no one right answer to which funding arrangement is best, there you should consider the following questions as you decide what type of plan is best for you.
Deciding between fully insured, self-insured or level-funded plans can be overwhelming. That’s why Fringe Benefit Analysts has a full team of insurance experts to help answer your questions. We’d love to sit down and discuss your questions and concerns; to find out which kind of insurance funding best meets your needs. Please contact us today!
