An ever increasing trend is for employers with 25 or more employees – who have overall good demographics and claims experience – to look into the advantages of Partially Self Funded health plans. These are enabled through Administrative Service Only (ASO) contracts where the insurance company or a Third Party Administrator (TPA), rather than fully insuring the group health plan, provide administrative services to the employer and its health plan – paying claims providing actuarial services, and possibly even supplying stop-loss insurance.
Partial Self Funding simply means that the small business employer is self-funding the more predictable aspects of the health plan, while re-insuring the possibility of catastrophic claims via a Stop-Loss Insurance policy. The Stop Loss coverage protects the employer both from high claims on any one individual or from high claims on the group as a whole.
This type of funding arrangement can be very attractive to the right employer group. However, it is a decision that should be part of a well thought out and deliberative process. There are numerous concerns regarding employee communication and education, as well as strategy – and a number of missteps possible along the way. That said, in the end it can be a great transition for the right small business employer.
As a small business employer, if you have had good claims experience, partial self funding provides the opportunity for your business to enjoy the financial rewards of that good claims experience. Unlike a fully insured plan, which under the Affordable Care Act (ACA), “Obamacare,” are required to use community rating. Community rating deprives individual small businesses from benefiting from their own good claims experiences. Rather their claims experience must be averaged in with the claims experience of other small employers in their community.
One of the exemptions for partially self funded plans under the ACA is for community rating, allowing small business employers using self funding to enjoy the benefits of their own good claims experience. Additionally, partially self funded plans can save money through ACA exemptions for the ACA Health Insurance Tax (HIT), exemptions from some ACA and state mandated benefits, and exemption from Federal health Insurer fees.
A partially self funded plan will give you more control, over your business’ particular health plan. It will give you access to certain reporting packages showing claims information and other data that can be used strategically to improve the overall financial viability of your business’ health plan.
Further, since partially self funded claims are paid on average approximately two months after fully insured claims, a small business employer would get a initial boost in cash flow. This is often used to build a reserve fund.
Also, small business employer groups with a high percentage in male employees are not able to rate their male employees accordingly under a fully insured plan – being subject to Obamacare’s Community Rating requirements. Partially self funded health plans would afford this opportunity.
Admittedly, a small business employer is subject to more risk through a self funding arrangement. However, much of that risk can be re-insured via a Stop Loss Insurance policy to insure against individual and group catastrophic claims. When you shop for and select this stop loss insurance, you can choose the level of risk you choose to take on.
You can prepare for uncertainty as you begin to transition from a fully insured plan to a partially self funded on through a series of steps. First, you can use those first couple of months of extra cash flow to build up that reserve fund for paying claims. Second, while you have a cap on annual financial liability, the reserve fund you set up will help with the month-to-month variations in cash outlay. Also, there are level funded plans available as well.
In the end, partially self funded plans give you an opportunity to use your group health insurance plan to do a much better job of recruiting and retaining the finest talent for your small business. In the end, this is the primary reason for having an employee benefit plan.
