Self-Funded Insurance Models Provide New Options for Small Businesses

Many small businesses find themselves paying increased health insurance premiums year after year, eventually prompting them to consider dropping health benefits altogether. According to the 2013 Aflac WorkForces Report, 47 percent of businesses with fewer than 100 employees say offering robust benefits while staying within budget is a top challenge.

Although it could be tempting to send employees to state or federal health insurance exchanges, the fact is small businesses need to offer those benefits to help attract and retain top talent. The study found that 61 percent of workers would be at least somewhat likely to accept a job with a more robust benefits package, but lower compensation. In addition, 84 percent of workers say their overall benefits package has at least some influence over their job satisfaction.

Predictably, many businesses are looking for a way to maintain health insurance for their employees while cutting costs and increasingly expensive benefits. Enter the self-funded insurance model.

Self-Funded Insurance

What is the self-funded insurance model?

In a self-funded insurance model, a business has the option of providing health benefits directly to employees. That means the employer, instead of the insurance companies, collects the premiums, assumes the risk and pays employee claims.

However, insurance companies can still be used to execute the administrative aspects.

How can a small business implement the self-funded model?

Employers calculate the total anticipated claims their employees will make over the course of the coming year.

Businesses can then use that figure to establish the maximum risk they are willing to assume, effectively capping the annual amount they plan to spend on benefits.

What if the company can’t afford to pay its employees’ claims?

It is possible for employers to underestimate their annual health care expenditure. To prevent these situations from sapping additional resources, companies can purchase stop-loss insurance. Stop-loss insurance kicks in when claims exceed the employer’s set maximum value to cover the remaining costs and can come in different forms.

With specific stop-loss insurance, any single employee’s claims that exceed a set amount will be covered by the insurer. With aggregate stop-loss insurance, coverage begins once total costs for all employees exceed the maximum claims projected by the self-funding plan.

Employers can purchase both types of coverage.

Does the self-funded model hurt small businesses that can’t afford to offer as many benefits as exchanges?

Business owners who cannot afford the level of coverage comparable to the benefits options that are available on exchanges or what they were offering previously should consider looking to voluntary insurance to help round out existing major medical plans. The benefit to voluntary is two-fold:

1. It doesn’t add to an employer’s benefits costs because it is paid for by the employee.


2. It satisfies employee demand. (60 percent of workers say they would purchase voluntary products if offered by their employer.)
   

What’s the advantage for businesses?

Although adopting the self-funded model and assuming more risk might sound overwhelming, it has proven to be an effective method for businesses to get their costs under control while still attracting and retaining top talent through health benefits.

Health Insurance Photo via Shutterstock

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