Combat Rising Costs of Health Benefits: Explore These 4 Funding Options
Employers are often stuck in a cycle of continually having to pay more for health insurance benefits for their employees. During the 12-month period ending September 30, 2022, U.S. employee benefit costs increased by 5%. Fortunately, there are strategies that can be used to help contain costs beyond the traditional fully insured models.
Among those alternate funding options:
Self-funding is one of the alternate funding options available to employers. With this option, employers pay employee healthcare claims from their own funds rather than buying insurance from a health insurer and paying a premium upfront. Generally, employer and employee contributions are set aside (“reserved”) to pay for the claims. To manage the claims process, employers use a third-party administrator (TPA) for administrative services.
Advantages of Self-Funded Health Insurance Plans:
- Allows greater control over health insurance costs and budgets
- Improves cash flow as premiums are not prepaid to a separate insurer
- Gives the flexibility to customize coverage and contract with healthcare providers
- Subjects employers to less regulation and taxes than other types of plans
- Offers insight into claims data for more informed risk management and potential cost savings
- Has the potential for investment income from unused funds set aside to pay losses
- Can limit liability with stop-loss coverage that can pay claims over a certain amount
Disadvantages of Self-Funded Health Insurance Plans:
- Transfers financial risk to employers to pay claims
- Primarily available to larger employers who have sufficient funds to pay all costs
- Can be difficult to predict claims from year to year
- Increases employer vulnerability to catastrophic losses, especially if no excess insurance is purchased
- Requires long-term commitment and expertise to set up
Level-funded health plans offer a compromise between self-insured and fully insured plans. Employers pay a fixed amount into a separate fund to cover claims, TPA fees, and other associated costs, which are estimated prior to the start of the plan.
Advantages of Level-Funded Insurance Plans:
- Potential for refund if actual claims, costs, and expenses are lower than estimated
- Ability to anticipate monthly costs and improve cash flow
- Flexibility to customize coverage and access to optimal health networks
- Lower financial risk than self-funded plans
Disadvantages of Level-Funded Insurance Plans:
- Must pay claims, regardless of cost
- Cost savings can be outweighed by administrative fees
- Complex setup requires a team of experts
- Usually only available to smaller employers
- Financial risk to pay claims is placed on the employer
The National Association of Insurance Commissioners (NAIC) states that a captive is a subsidiary owned by a non-insurance parent company, and serves as a self-insurance method. By acting as its own insurance company, an organization is able to take control of their insurance costs instead of paying premiums to a third-party health insurer.
Advantages of Captive Insurance Plans:
- Stable pricing and reduced renewal costs
- Tailored coverage based on organization’s needs and claims experience
- Ability to cover a variety of product lines such as general liability, property, professional liability, and workers’ compensation
- Greater control over claims and cash flow
- Potential tax benefits
- Range of structures available, such as single-parent, group or association, segregated cell, agency, and risk retention groups
- Access to reinsurance market for risk over $250,000
- Loss control incentives
Disadvantages of Captive Insurance Plans:
- Takes time and requires independent actuarial study to set up
- Requires long-term commitment and employer’s own capital at risk
- It can be expensive, with a minimum of $500,000 annual premium
- It can be confusing, with many details to consider
- Must have substantial financial resources to keep sufficient reserves to pay claims
- Requires expertise to establish correctly
Reference-based pricing plans often utilize reference-based pricing, wherein employers pay healthcare providers a predetermined amount (based on the customary Medicare rates) for various medical services and procedures, instead of negotiating prices with providers. If the provider wishes to charge more than the set rate, the patient is responsible for the remaining cost.
Advantages of Refence-Based Insurance Plans:
- Potential to lower overall healthcare costs
- Caps how much employers will pay for services
- Avoids network contracts that tend to increase every year
Disadvantages of Refence-Based Insurance Plans:
- Limited to out-of-network emergency and lab claims
- Employees may be billed for the balance if the provider wants more than it receives from the employer
- Transfers more of the cost of care to employees and healthcare providers
- Focuses only on low-cost providers, disregarding quality
- Excludes prescription drugs
Have you thought about your options for controlling healthcare costs?
Consulting a broker can help you decide which options are best for your organization. For a comprehensive assessment of your benefits plan and advice on cost-saving strategies, contact our Employee Benefits team.
Reach out now to learn how we can assist you in managing healthcare costs effectively.