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Self-Funding
Financing Employee Benefits
Escalating health care costs in recent years have
made it increasingly difficult for employers to provide health insurance
benefits to their employees at a reasonable cost.
As a result, employers have sought alternative ways and means to keep the
costs of their benefit programs under control. Some have opted to drastically reduce benefits;
others have chosen to change insurance carriers frequently, utilizing
whichever insurance company happens to have competitive rates at that time.
Both of these can have a negative effect on employees, and is certainly
only a short term solution to cost control.
Further, it is especially frustrating for those
employers whose claim utilization is ordinarily low compared to insurance
premiums paid. This employer is usually heavily subsidizing an insurance
risk pool whose loss ratio is much higher than his own.
We believe these are long term
problems that require more than short term solutions.
What then can be done to stabilize your costs as an
employer and maintain quality benefits for your employees?
The Feasibility of Self-Funding
We believe that traditional group insurance plans
require employers to over insure their employee benefits. This enables the carrier to charge high
premiums, establish a reserve to its own liking, benefit from the use of
your reserve funds and profit further from the low claim utilization of
your group.
As an alternative, why not share in the financing of
the plan to the extent that it is feasible from an experience stand point?
Self-funding means sharing in the surplus, but it
also means sharing in the risk. You, as
the buyer, however, have the privilege of sharing only in the risk that
your own circumstances dictate. Group
health insurance risks can be easily categorized and
defined as;
·
PREDICTABLE LOSSES
Those
losses that occur frequently, but are relatively insignificant in size and are
predictable based on the group’s makeup of age, sex and plan of benefits.
·
UNPREDICTABLE LOSSES
Those
classes occur infrequently, but are catastrophic in terms of size.
The most efficient
purchase of insurance is to insure for unpredictable losses not predictable
losses. No matter how high the cost of medical care, statistics indicate that
adverse claims experience normally is a result of extensive claims by a limited
number of individuals. Consequently,
it is wise to purchase insurance to protect against this risk.
The amount of insurance necessary is dependent upon the size of the
group. A smaller group requires more
protection than a large group.
By purchasing insurance only for unpredictable or
catastrophic claims, you greatly reduce high premium costs and thereby
create cash savings to fund for predictable claims.
In addition, you will benefit from:
·
REDUCED FIXED COSTS
A
Third Party Administrator will administer your plan with less overhead
expense than an insurance carrier.
·
LOW CLAIMS UTILIZATION
Most
group insurance plans have no provision for refunding overpayment of premium,
effective coordination or subrogation of benefits.
·
REDUCED PREMIUM TAX
Premium
tax is normally computed as a percentage of premium.
·
INTEREST OR RESERVES
Your
company retains the claim reserves traditionally held by insurance
companies.
·
SELF-FUNDING
A
method of funding benefits to pay for anticipated losses, with provisions
for stop-loss coverage.
HOW STOP-LOSS WORKS
Stop-loss coverage comes
in two forms: Specific and Aggregate.
·
SPECIFIC STOP-LOSSPROTECTION
This
provides a maximum dollar amount of all covered claims that a benefit plan
would pay on any one individual during a plan year. The stop-loss carrier reimburses the plan
for claims paid in excess of the specific stop-loss.
·
AGGREGATE STOP-LOSSPROTECTION
This
is protection coverage to limit the total liability on all participants on
a small plan year basis, thereby allowing the plan to budget for a maximum annual
liability.
·
THIRD PARTY ADMINISTRATOR
A
third Party Administrator is a licensed administrator providing all of the administrative
services previously rendered by your insurance carrier.
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