In health insurance, the payer is the organization responsible for paying claims. In a fully funded plan, the health insurance carrier is the payer. In a self-funded plan, the employer is the payer. While being the payer may seem like a bad thing, it’s actually a position of power. Whoever pays the claims is in control of the plan, and that control comes with a lot of advantages.
Why Is Self-Funding So Common?
If you’re running a farm, operating a manufacturing plant, or building a grocery chain, managing a health insurance plan can seem like an odd side project. So, why do so many employers embrace self-funding? It usually goes something like this:
- They need a strong workforce in order to meet their business objectives, and this involves attracting good workers and taking care of current workers.
- Most workers depend on employer-sponsored health coverage, so offering a good health plan option is a critical part of recruitment and retention.
- Traditional health plans don’t fit their needs, either due to rising costs, poor coverage or a combination of the two.
- Self-funding emerges as the only viable, long-term solution.
This isn’t a rare chain of events; most large employers choose self-funding. According to the Department of Labor, among employer plans with 5,000 or more participants, 89.7% were self-funded or mix-funded in 2021. Among plans with 100 to 199 participants, 28.2% were self-funded or mix-funded.
However, self-funding is not just an option for large employers. Employers with as few as 20 employees can also benefit from this approach, but many avoid it because they assume they’re not eligible. As a result, they miss out on opportunities that could help them grow.
Yes, self-funding means taking on more responsibilities. It means paying for claims, and accepting the risk associated with that (although this risk can be controlled with stop-loss coverage). But it also means taking control of your health plan, and this is where the real difference between self-funding and traditional funding lies.
Self-Funding Puts Employers in Control
When you were a child, you didn’t have to worry about bills or budgets, but you also didn’t get to decide what to buy. If your parents said no to a toy or pizza, that was that. As an adult, you have more responsibility, but you also have more freedom as a result.
The same basic idea applies to self-funding versus traditional funding.
- The payer decides the terms of coverage. You might want a plan that covers childbirth with little to no deductible, but if you’re using a traditional plan and the carrier says no, you’re hands are likely tied. With self-funding, you’re the payer, so you get to call the shots.
- The payer has access to the data. In traditional health plan arrangements, employers often don’t know what’s driving costs. Without this knowledge, they don’t know whether their premiums are fair, and they can’t enact meaningful change to lower costs. When employers step into the role of self-funded payers, they gain access to the data-driven insights they need to make smart decisions.
- The payer selects the vendors. It’s easier to let the carrier handle everything, but when you self-fund and select vendors on your own, you can customize the plan to your liking while obtaining the best value possible. It may take some effort to get everything set up, but once you have the third-party administrator, pharmacy benefits manager, utilization review management and other services you need in place, coverage can go smoothly.
Direct Plans Provide Even More Control
Many self-funded employers go through a health carrier for their provider network and third-party administrator services. As the payer, the employer still has a lot of control over the plan, but some control is relinquished to the carrier.
Why? Very often, the answer may simply be that employers don’t know how else to go about things. Health insurance carriers have been in charge of plans for so long, even with the switch to self-funding, the healthcare infrastructure is still built around carriers. But it doesn’t have to be.
Employers can contract directly with the health providers in their community. This eliminates the need for a traditional carrier’s network, and it gives employers even more flexibility and control over their benefits.
Health2Business is helping employers take back control of their health benefits by contracting directly with local healthcare providers. It’s a simple but revolutionary approach that lowers costs without sacrificing quality of care. Learn more.
