Self-Funding Health Care: How Should Business Owners Approach It?

David Rodeck

Self-Funding Health Care: How Should Business Owners Approach It?

Self-funding health care plans have typically only been used by large organizations. However, small and medium-sized businesses have begun using this approach to control costs and get more flexibility with their coverage. Below we’ll take a look at how these plans work and when they make sense.

How Self-Funding Works

In a traditional health insurance plan, you and your employees pay premiums to an insurance company. In exchange, the insurance company covers the majority of health care expenses and puts a cap on how much you pay per year.

With self-funding health care, the employee premiums go into a pool of money managed by a third-party administrator. Whenever an employee has a medical claim, it gets paid out of your pool of money. If the pool runs out, you need to make up the difference out of company funds.

There’s also an option to add a stop-loss policy to your self-funded plan for protection. These plans cover your expenses once you pay past a maximum amount — such as when an employee has more than $50,000 in medical bills while working for you.

Self-funding makes up a small, but significant part of the market for small and medium business health insurance. In 2016, 13 percent of insured employees working in a small business, one with 200 or fewer employees, were in self-funded plans, Forbes noted, citing a report from the Kaiser Family Foundation (KFF).

Pros and Cons of Self-Funding

Self-funding health care can address several problems with the Affordable Care Act (ACA). First, premiums for small business ACA plans are set by a community rating, meaning they’re set by the health of an entire area’s population versus the health of the employees in a business.

As a result, business owners see their premiums going up even if their employees are healthy and rarely use medical care. With self-funding, the cost depends on the health of the employees and how often they use care.

On the other hand, if some of your employees get sick or injured and have large bills, you’ll pay more per year for these plans. Your business will need to make up the extra uncovered costs using your funds until the stop-loss plan kicks in. This could strain your budget and create uncertainty because it’s impossible to predict when someone will get sick.

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Suitability for the Business

A self-funded health care plan could make sense if your workforce is relatively young and healthy. That reduces the likelihood that you’ll face major medical bills, so you could end up paying less.

The more employees you have, the safer it is to self-fund. You’ll have more people paying premiums into the plan and this spreads the hit of a major expense across more people. A small business with 25 employees could better handle the cost of a large expense than a business with only four employees.

In any case, you’ll want to seriously consider matching your self-funded plan with a stop-loss plan. That way, you’re not on the hook for unlimited bills. You should also have enough in cash reserves to handle the maximum potential out-of-pocket cost from your stop-loss plan.

Consider this information and decide whether self-funding makes sense as an alternative to your traditional health insurance plan.

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