Is It Time to Reconsider Self-Funding Health Insurance?

Self-funding can result in cost savings and access to more data to drive better plan designs, but plan sponsors need to weigh that against all they will need to manage.

It’s a job seekers’ market, with the “Great Resignation” leading employers to compete for talent—and having great health benefits can help them do that. However, employers also need to keep an eye on their costs.

“Enhancing the benefit offering is more important than ever,” notes Keith Lemer, CEO of WellNet Healthcare Plan in Washington, D.C. However, expense reduction and cash preservation are priorities when considering benefit enhancements.

In WellNet’s “Second Annual Self-Insured Survey,” 550 benefits brokers and consultants from across the nation with experience in both the fully insured and self-funded marketplace were asked, “What method of funding [health benefits] do you believe is in the best interest of your customer’s long-term strategy?” Nearly all (93%) said self-insured was the best method of funding health benefits. Lemer explains that it’s the one area within group benefits offerings that gives employers insight and control. “They can see what’s driving costs and take actionable steps,” he says.

Three in 10 of the brokers and consultants surveyed said their clients only need to see a 10% savings over their fully insured premiums to consider self-funding health benefits. Similar percentages said their clients need to see 15% savings and 20% savings. The No. 1 deciding factor in clients choosing to self-fund was frustration over health insurance renewal rate increases every year.

However, nearly half said their fully insured clients remain that way because of the perception that there is too much risk in self-funding, and around 30% said it is due to the perception that the company is too small to self-fund.

There are several historical reasons self-funding has advantages, says Courtney Stubblefield, senior director, health and benefits at Willis Towers Watson in Houston. “Typically, over time, the plan sponsor has lower costs,” she says. “The employer pays claims as they happen and pays for administration services. They avoid premium taxes and other items that increase insurance company profits.”

Stubblefield adds that plan sponsors have more flexibility in terms of covered benefits. “It’s easier to cover retirees if they want,” she says, “and they can set policy limits and provisions. She notes that the number of employers that self-insured their health benefits grew after the Affordable Care Act was passed.

One other argument for self-insuring that has played out is the ability to have better access to employee claims data to see what’s driving cost, says Stubblefield. “Employers more than ever want access to the data underlying their plans to see what is being paid and what claims are affecting costs,” she notes.

Weighing Full Insurance and Self-Funding

Lemer says he believes employers’ perception that they would be taking on too much risk by self-funding is really a lack of understanding about how the strategy works. “Whether fully or self-funded, health plans are built with claims administration, and self-funded plans usually have stop-loss insurance to handle catastrophic claims,” he says. “When employers are educated about it, they realize that in most years, they can win the bet on self-funding because they don’t pay out as much as the premiums they receive from employees. Self-insurance requires more work, but it includes a dialogue and understanding of costs and what employers can do about them.”

For plan sponsors worried about the volatility of claims, Lemer says they can use claims data to know what specific stop-loss insurance they need for high-cost individuals in addition to the aggregate insurance that will cover a catastrophic claim for any employee. “The proper insurance will mitigate volatility and risk,” he says.

Lemer says his firm typically sees self-insurance by plan sponsors with 100 employees or more, but whether an employer of any size can self-insure depends on if the plan can be structured to be affordable for the plan sponsor. “Looking at ways to get treatment drugs less expensively, for example,” he says.

That’s the main benefit of self-insuring: the ability to manage the plan, Lemer adds. “Insurance carriers that offer health benefits are not driven by controlling claims cost,” he says. “What employers and employees want is high quality at a low cost. Employers can use information to manage the plan while offering employees the flexibility to use different doctors and health care centers or hospitals.”

Lemer says employers ultimately decide to self-fund because of the cost savings to them. They realize they can manage and control the plan and improve employees’ experience.

For example, Lemer says, a prescription drug that costs $60,000 through an insurance company can be sourced internationally by a self-insured employer for half the cost. In addition, if an employee needs a surgery that would cost $100,000 under a fully insured health program, a self-insured plan sponsor can use an independent third-party administrator that can negotiate for the surgery at a high-quality facility for a lower cost. Lemer says there are 20 to 25 health items that can similarly be negotiated via a self-insured plan to manage quality and cost.

Stubblefield says typically, self-funding makes the most sense for larger employers—between 500 and 1,000 employees among Willis Towers Watson’s clients. About one-quarter fully insure and the rest self-fund or use a hybrid approach. Among employers with 2,500 employees and more, nearly all self-fund.

Part of the reason plan sponsors move to self-funding is taking the risk of paying directly for claims and not having to transfer risk to an insurer, Stubblefield says. Another part is the bigger desire to manage the plan and be more creative, innovative and flexible. Self-funded plan sponsors have more freedom and less regulation, she says.

When considering moving from fully insured to self-insured, plan sponsors need to get a proper quote for the cost of self-insuring, Lemer says. If plan sponsors can get information about the claims experience from the fully insured health plan provider, they can get a better quote on what self-insurance will cost, Lemer says.

Typically, employers hire a broker or consultant to go to the marketplace for a TPA or provider that offers administrative services, he says. These providers will scrutinize claims data to suggest improvements for benefits and cost savings.

To change from fully insured to self-funded, a plan sponsor would need to secure a provider to pay claims. Stubblefield says most employers don’t have the internal mechanism to do so. Plan sponsors will need to decide the best network of providers to use and how to design the plan. “There’s a lot of management involved,” she says. “It’s not just a flip of a switch. There’s a fair amount of work and thoughtful decisions to transition.”

That’s something a plan sponsor would have to consider: the number of things it will have to manage. “When fully insured, everything is managed for you,” Stubblefield says. “When self-funded, the plan sponsor not only manages plan design, but the provider network, data and what’s driving costs, vendor contracts and stop-loss insurance.”

Something else to consider, she says, is the highly volatile nature of health claims the pandemic has caused. “We’re in a place where COVID treatment costs are likely to flow at a higher rate in plans, and plan sponsors don’t know what to expect,” she says. “We could continue to see high-cost claims. They’ve trended higher over the past several years, and there’s a degree of uncertainty with the pandemic. Full insurance gives the benefit of knowing costs and letting someone else manage risks at least for a year at a time.”

Lemer notes that WellNet’s survey found 75% of brokers said a company’s C-suite is more involved in health plan decisions this year. “If that remains the case or gets higher, I think self-insured health benefits will be more accepted,” he says. “It takes corporate leaders seeing there is a better way. They just need education.”