How Self Funded Health Plans and Stop-Loss Insurance Protect Small Businesses

Selecting the right health plan can be a critical component in the growth and success of a business. With the rising premiums and increased complexity brought on by the introduction of the Affordable Care Act (ACA), a growing number of employers are now choosing to self-fund their medical plans as a long-term strategy to cut costs. In a self-funded health plan, an employer pays for their own medical claims directly, while a third-party administrator (TPA) administers the health plan by processing the claims, issuing ID cards, and handling customer questions, according to a recently published Cigna whitepaper. For companies with less than 250 employees, a self-funded health plan usually includes the purchase of stop-loss insurance, which limits the claims expenses that the employer’s self-funded health plan is responsible for per covered individual per year.

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Defining Stop-Loss Insurance

To go a little deeper, medical stop-loss insurance protects employers from assuming all of the liability for losses that results from an unexpected amount of claims–either from an individual or the entire workforce,” according to a Guardian Anytime article. With stop-loss insurance, a business owner is not responsible for the claims that exceed specified pre-set limits for the plan policy year. When expenses surpass the pre-determined limit, the stop loss carrier will assume liability. There are typically two variations of stop-loss insurance. Individual Stop-Loss protects against large catastrophic individual claims. This coverage reimburses you for qualified claims made by employees or dependents that exceed the individual deductible. Aggregate Stop-Loss insurance protects against high claim volume. This style of coverage reimburses you if the total claims of all your employees exceeds the overall deductible for the policy year.


Benefits of Stop-Loss Insurance for Small Businesses

Even if a company’s workforce is generally young and healthy, medical claims can quickly spiral out of control due to unexpected health issues. For example, an employee may be in need of a very expensive procedure, such as a liver transplant, or numerous employees may fall ill due to an outbreak that spreads throughout the workplace. When businesses self-fund their medical plans, they often also purchase stop-loss insurance to protect against life’s inevitable and unexpected surprises.

Over 85 percent of self-funded employers with up to 5,000 employee purchase stop-loss coverage, according to a recent study. Stop-Loss insurance can be potentially life-saving when it comes to protecting your company’s finances. Events like surgeries, transplants and cancer treatments cost anywhere from thousands to hundreds of thousands of dollars. For some companies, even having to pay for one of the procedures just described could be potentially financially devastating for a business owner.


How You Can Save Money by Self-Funding

With a self-funded health plan, there are a variety of benefits that allow businesses to cut costs. When it comes to tax savings, a self-funded plan requires businesses to pay taxes on stop-loss premiums only, approximately 10 percent of health care expenses. This is in contrast to a 2.5 percent insurance premium tax in most states. When self-funding, there is an estimated 90 percent reduction in state premium tax.

In addition to tax savings, companies who choose to self-fund also experience lower overall healthcare costs and better cash flow, especially when employee claims are lower than expected. Self-funded companies can save a great deal when compared to high insurance premiums. With that, you’ll have a greater monthly cash flow to invest into hiring new employees or other ways of expanding your business.

The introduction of the ACA brought with it a 2-3 percent increase of premiums on fully insured plans, but self-funded medical plans are exempt from these fees. Exempt from state-mandated medical benefits, companies who self-fund enjoy greater plan flexibility that allows them to truly determine the best coverage for their employees based on individual needs. Self-funded companies can also better track expenses and data such as total charges, payments and provider utilization. Theses insights allow self-funded business to design optimally efficient benefits plans.


Clearing Up Common Self-Funding Myths

According to the Cigna whitepaper, small employers have been “reluctant to self-fund their health benefits due to the misperception that self-funding only works for large companies.” This is no longer the case because of all the stop-loss insurance and innovative self-funding options that are available today.” In fact, there now exist new products and services that are specifically designed for employers with fewer than 250 employees that can even make self-funded health plans a cost-effective option for employers with as few as 25 employees.

Despite the benefits of a self-funded plan, there are also benefits to a fully-funded plan. In terms of cost, you know at the beginning of the year exactly what your healthcare costs will be. Those costs remain in place until a new deal is settled. A self-funded plan can greatly exceed anticipated costs and create problems. While stop-loss can protect companies from paying excessive claims in a given year, if a major incident occurs, the cost of the stop-loss insurance purchased will likely rise. If a self-funded company chooses to run the plan internally, rather than use a third party administrator, there can be higher-than expected administrative costs. The purpose of this blog isn’t to argue that self-funded plans are a quick-fix or cure-all. Instead, we hope to provide you with an overview that will help you make an informed decision when selecting a health plan for your business.

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