Self-funded insurance is when employers directly pay for employees health and workplace benefits, rather than buying coverage from an insurance company. Self-insurance is different from traditional health care plans, where employers pay a fixed amount for predetermined healthcare coverages. When self-funding, employers typically hire a TPA to administer their program and handle the day-to-day work of processing claims and employee questions
Of course, there is a high risk for a high reward. When employers take on the financial responsibility of self-funding their employee benefits program, there is the chance that costs will grow to be higher than anticipated. Employers will often set aside a fixed amount of funds, based on an expected spend per employee. However, when unpredictable and costly claims become frequent, the fund will be exhausted faster than anticipated. Leaving employers at a loss, rather than profiting from self-funding insurance.
For a significant amount of employers, self-insuring their benefits program is worth the risk. If circumstances go according to plan, self-insuring can have a plethora of benefits. First and most importantly, self-insuring is a cheaper option. Traditional insurance plans require employers to pay a premium whether employees are using the coverages or not. There are only smaller administrative fees for self-funded plans, and if employees are not making claims, there are no additional costs. Employers also have more control. They can construct a healthcare program focused on the needs of their employees. By doing this, employers avoid paying for irrelevant coverages and include every needed coverage. Employers will also receive clearer insight for providing healthcare coverage, especially if they are using a TPA.
There is no way to avoid the risk entirely. However, there are few things employers can do to minimize their chances of loss. You can start by knowing your workforce. If you have a young and healthy workforce who will not need a significant amount of medical support, self-funded health care is probably the better option. You can also purchase a stop-loss policy — an insurance policy for an accumulation of costs far beyond the anticipated amount. Last but not least, you have to pay attention. Keep track of every aspect of providing health care; procedural prices, medical facility quality, claim activity, prescription use, etc. Now, that is a great deal of added responsibility which is why most recommend hiring a TPA. Costs are much lower than paying premiums and employers can rest easy knowing that professionals are monitoring their health care plan.