When it comes to health insurance, large and small firms are always seeking ways to improve efficiency and provide employees with robust benefits while keeping out-of-pocket costs at a minimum. Many employers are finding that self-insurance (also known as self-funded insurance) is the answer.

Put most simply, self-insured employers pay all or some of their employees’ health insurance coverage costs directly. In a self-insured workplace, “the employer assumes the financial risk of providing medical coverage, and pays for eligible medical claims from a designated fund set aside for that purpose,” said Drew Thompson, head of business development for Northwell Direct.

By contrast, in a traditional fully insured plan, companies pay monthly premiums to an insurance carrier, which then covers the costs of eligible claims. This arrangement can offer less financial risk for the employer, as the insurance company is responsible for managing and paying out claims

In recent years, a growing number of businesses have made the switch to self-funded insurance. Today, more than two out of three employees are members of this type of insurance plan. Considering making the switch to self-funded insurance? Here are answers to four questions you might have.

What is self-funded health insurance? Self-funded health insurance, also known as a self-insured health plan, is a type of health coverage where the employer assumes the financial risk for providing health care benefits to its employees. Instead of paying a fixed premium to an insurance company, the employer pays for each out-of-pocket claim as they are incurred. This approach allows employers to have more control over their healthcare costs, offering flexibility and potential cost savings.

How can self-insurance save a company money? Because your company only issues payments when claims are actually incurred, more money remains in your company’s account (in the fund you’ve designated for claims), earning interest and improving cash flow. Mr. Thompson offered this simplified example: “Let’s say that, with a traditional insurer, your company pays $100 per month in premiums. You pay that regardless of the actual monthly claims your employees file. If there are $60 in claims that month, the insurer keeps the leftover $40. And if there are no claims, the full premium stays with the insurer,” Mr. Thompson said. “With self-insurance, those funds stay with your company to invest and grow.” Multiply that basic example by tens or hundreds of thousands, and you get the picture.

Other ways that self-funded health plans save your company money include:

• Reduced administrative costs: Self-insured plans often incur lower administrative costs compared to fully insured plans. This is because companies can avoid the overhead costs and administrative fees insurance companies charge for profit margins, risk assessment and underwriting.
• Flexibility in plan design: Companies with self-insured plans have greater control over tailoring their health benefits to meet their employees' needs. This can lead to more efficient spending on health care by focusing on services that are most beneficial to their workforce.
• Direct access to claims data: Self-insured companies have direct access to claims data, which allows them to monitor and manage health care costs more effectively.
• Control over reserves: In self-insured plans, companies retain the funds allocated for health care costs, allowing them to earn interest on unused reserves. This contrasts with traditional insurance policies, where any unspent premiums typically remain with the insurance provider.

Is self-insurance risky? Companies do assume some risk with self-funding, which is why it’s important to take certain protective measures. Using the scenario from above, let’s say you have traditional, premium-based insurance and your employees file $150 in monthly claims—an amount that exceeds the $100 premium paid. Your health insurer absorbs that additional cost. If you're a self-funded employer, your business must absorb claim costs above what may have been anticipated. That means your company needs to have enough money in reserve to cover unplanned-for costs. Depending on your company’s size and revenue, this can be risky.

While self-insuring exposes companies to potential high-cost claims, stop-loss coverage, also called reinsurance, helps mitigate this risk. “Stop-loss coverage limits an employer’s financial liability, capping the amount a company pays for claims,” said Mr. Thompson. “If an employee incurs thousands of dollars in medical expenses, the stop-loss insurance covers those higher costs.” Companies that choose this option have partially self-funded plans.

How do you switch to self-insurance? One way to switch to a self-funded option is to find a broker or benefits consultant who can help you select a Third-Party Administrator (TPA) and provider network, said Gregg Nevola, Northwell Health’s vice president and head of benefits. If your company has an established relationship with a broker or consultant, start with that person. Otherwise, Mr. Nevola recommended initiating a request for proposals (RFP). “Look for a broker or benefits consultant who has experience with self-insurance plans for a business of your size,” Mr. Nevola said. “You should also consider their relationships with insurers and whether they offer additional services like onsite enrollments and help with compliance requirements.” Another option would be first finding and selecting a provider network that best meets the needs of your company’s size and employees. Some networks, like Northwell Direct*, can then coordinate the TPA for you. The TPA will be responsible for managing and administering the plan and will serve as your employees’ main point of contact. Putting these pieces into place will help ensure the quality and efficiency of your self-funded plan, and the satisfaction of your workforce.

Contact us to learn more about switching to self-insurance with the Northwell Direct network.

*Northwell Direct’s provider network is provided through Northwell Direct Administrative Services Organization, Inc.