As part of self-funded medical insurance plans, employers frequently buy stop-loss insurance in order to prevent catastrophic losses over any single year. Those employers typically end up also paying for an Administrative Services Only (ASO) plan to manage their employees’ medical bills. And while stop-loss insurance and ASO plans are added expenses, employers ideally see lower health care costs through self-funding compared to paying for a traditional health insurance plan.
Self-funded health plans were, at one time, only affordable to larger employers. But now smaller employers are attracted to self-funded plans’ potential savings over traditional insurance plans, plus they benefit from detailed claims reports that help them adjust coverage year after year to improve benefits and further lower costs.
However, self-funded plans come with several challenges. They require significant cash reserves to start, and employers have to make a long-term commitment to see the benefits over time. Over the short term, that means employers may see several high-cost years that decrease cash flow and threaten past savings.
Specific vs. Aggregate
Stop-loss insurance is one key way through which employers are able to enjoy the full benefits of a self-funded plan. It comes in two forms: specific and aggregate.
With specific stop-loss coverage, the plan ensures that no specific employee with a catastrophic illness will deplete the employer’s savings. If someone in the company is diagnosed with a chronic illness that requires expensive treatments, the company won’t suffer financially because of those costs. Once an individual reaches the set cost threshold, the claims are no longer charged back to the employer for the rest of the year. Aggregate insurance, meanwhile, protects the company from a year with an unusually high number of medical claims: Once the total cost of medical bills across the company reaches a set threshold, the stop-loss plan covers the remainder for the year.
The Right Choice for the Right Workforce
Self-funding can be an excellent choice for a smaller employer with a young, healthy workforce. Because a young workforce is likely to have fewer medical problems, the company generally has a lower chance of facing steep medical bills. And if the young workforce is mostly single, then the company isn’t responsible for as many family medical bills. Of course, within a few years, a young workforce may very well become a collection of employees with spouses and children who frequently visit the doctor.
Overall, the law of averages benefits employers that opt to self-fund. Between 1999 and 2014, the percentage of workers covered through a self-funded health insurance plan grew from 44 percent to 61 percent. Today, even smaller employers can self-fund, and because self-funding allows all employers to save money with a controlled amount of risk, the trend is likely to continue to rise.
Dylan Murray has an MBA from San Diego State University and a bachelor’s degree in communication from Boston University. He is a licensed insurance agent in California, but he works as a professional researcher and writer reporting on business trends in estate law, insurance and private security. Dylan has worked as a script analyst with the Sundance Institute and the Scriptwriters Network in Los Angeles. He lives in San Diego, California, and Marseille, France.