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Why Self-Fund?

For the past two decades, health care costs have been the fastest growing component of the corporate budget. There are many causes of this double-digit rise, including new costly medical technology, personal lifestyle habits, cost shifting from government programs and the aging of the population. There are also many strategies employers have implemented to reduce the impact of run-away costs. Smart employers have combined cost management strategies with self-funding to hold benefit costs to a minimum.

Over 65% of U.S. employers effectuated some form of self-funding for their medical benefit program in 1991. That percentage has increased steadily over the past decade as employers have realized the strong positives self-funding offers in helping control costs.

More and more companies are turning to self-funding to avoid unnecessary charges and costs and to gain control over health care expenditures. Through self-funding, the employer is in control of the benefit dollars, the benefit design and the reserves. The result is savings in benefit payout.

The rationale of employers in implementing self-funding makes sense. That is to lower the ongoing fixed costs associated with the benefit program and pay only for claims experienced by their employees. Since over 80% of employees and dependents experience low dollars in claims, the savings for these employees are great.

For those employees and dependents with catastrophic claims, the other 20%, employers purchase stop loss insurance to minimize risk. Stop loss insurance for self-funded benefit programs is inexpensive compared to premium rates for fully insured benefit programs and protects the employer from high dollar individual and group claims, therefore eliminating the risk of catastrophic claims.

Why Self-Funding Saves Benefit Dollars?

The charts below display that for each dollar spent for self-funded plans versus insured plans, self-funded plans concentrate more into paying employee claims. To translate this savings, for a benefit program with 80 employees with $240,000 of claims payments, the average amount paid by self-funded plans to pay these claims is $288,000 while insured plans average $375,000. This is an average savings of 23% for self-funded plans.

The following table displays important differences that lead to the savings:

 

Insurance Plan


Self-Funded Plan


Required to Pay
Premium Taxes

Required To Establish
Reserves For Claims
Not Yet Submitted

Required To Establish
Reserves For Unexpected
Contingencies

High Operating Overhead
And High Administration
Fees Of Insurers

Insurer Keeps
Dollars Unspent

Higher Average Claims
Payout Per Employee



Not Required To Pay
Premium Taxes

Reserves Are Retained
By The Employer
 

Stop Loss Covers
Unexpected Contingencies
 

Third Party Administrators
Average Fees Is Lower
Than Fees Of Insurers

Employer Keeps
Dollars Unspent

Lower Average Claims
Payout Per Employee



 

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