If you have a stake in employee benefits, you know that benefit plans are changing at a very rapid pace – which can be very difficult to follow. Switching to a self-funded plan can help. You will pay only for what you need and use. With zero premium taxes and lower administrative costs, the savings can add up rather quickly.
With a self-funded healthcare plan, instead of paying monthly premiums to a commercial insurer, you are responsible for paying your employees’ healthcare claims directly. You pay the covered claims and also pay an administrative fee to a Third Party Administrator (TPA) to handle the paperwork, while you pocket the savings.
The Advantages of Self-Funding
Self-Funding has become the dominant financing method for healthcare plans for these reasons:
Cash flow advantages (general asset funding, e.g.).
Cost savings (no premium taxes, insurer risk charges, e.g.).
Plan control (employer is better able to control plan and its costs, e.g.).
Plan design flexibility (avoidance of state-mandated benefits, e.g.).
So long as employers are expected to be the primary source of financing, the dominance of self-funding in the future may be expected. Comparing a self-funded plan to an owned plan and a fully insured plan to a rented plan, one may easily grasp the simplicity of self-funding, and how it contrasts to a fully insured plan. There are disadvantages of self-funding, however, as not all people want the responsibility of plan ownership. For several reasons, the preferred term is self-funding and not self-insurance.
Experts in Self-Funding
Self-Funding Actuarial’s Carlton Harker wrote what has been considered “The Bible of Self-Funding” for over 30 years.