Self-Funded Plan Example

Example: ABC Incorporated

ABC Inc. has 139 emlpoyees.

ABC Inc. is currently fully insured with "fully insured" carrier. Current Premium is $570,000 annually. Claims experience shows that only 50% of ABC Inc’s annual health insurance premium is due to claims experience.

If ABC Inc, sets up it’s own Self-Funded plan, with a PPO, and better administration, why can’t ABC Inc then retain that 50% savings instead of paying it to the fully insured carrier?

Partially Self-Funded EXAMPLE Quote with Stop-Loss coverage for ABC Inc:

	Specific Deductible: $25,000.00 

	Specific Contract Period: 12/15 

	Aggregate Contract Period:  12/12 
  
 
	Fixed Costs:

      						Employees  
 
	Employee Only: 	$116.30 		   96 		$11,164.80
 
	Family 		$205.90 		   43           $8,853.70 

	Monthly fixed costs    					$20,018.50   

 

  

	Maximum Claim factors/Costs: (Aggregate Factors)

      						Employees   

	Employee Only 	$141.00 		   96 		$13,536.00
  
	Family 		$403.00 		   43 		$17,329.00 

	Monthly claims
	(aggregate attachment point)     			$30,865.00 
 

 

 

	Conventional Equivalents: (total maximum monthly costs) 

 	     					Employees   
	Employee Only
	(fixed + claims factors) $257.30 	   96 		$24,700.80 

	Family
	(fixed + claims factors) $608.90 	   43 		$26,182.70 

	Total Maximum Monthly Costs     			$50,883.50 

	Maximum Annual Plan Year Cost 
	(WORST CASE SCENARIO)
	(Aggregate Attachment Point)   		                $610,602.00

Analysis Review:

ABC Incorporated’s Worst Case Scenario is $610,602.00. Their fixed costs, which is the amount they must pay monthly is $20,018.50. Then ABC Inc. must reserve $30,865.00 monthly in a worst case scenario for claims.

Result: Currently ABC Inc is paying $570,000 for insurance with "fully insured carrier." By going self funded ABC Inc takes on a potential $40,602.00 more risk. But this is only in a “worst case scenario”, which is rare. A worst case scenario is where everything goes wrong with the self funded plan and there are multiple catastrophic medical conditions and illnesses.

By taking on the extra risk, ABC Inc will most likely see at least $100,000 in savings over the coming year, versus staying fully insured and having no savings opportunity.

Fixed Costs include:

I.D. Cards
Electronic Provider Directories
Plan Documents
Employee Booklets
Aggregate & Specific stop-loss coverage
Monthly Specific Accommodation
TPA Admin Fee
PPO
HIPAA
EDI
COBRA
Utilization Review.

The Fixed costs must be paid monthly. Claim Liability costs are only paid if claims materialize.

Note: When coming from a fully insured plan to a partially self-funded plan, it is very difficult to get claims experience from the fully insured carrier, and almost impossible to get large claims/shock claims reports. Because of this the Stop-Loss carrier does not know the actual risk it is getting into, and assumes a worst case scenario. This means the stop-loss carrier assumes that the group has some medical conditions. The stop-loss carrier then inflates the claims factors to protect against this. So the employer's rates will seem higher the first year than the current fully insured premium because the stop-loss carrier doesn’t know what they are getting into. After its first year, ABC Inc knows what it’s claims are running and will get a much more accurate and competitive quote the following year. Once again, what you are comparing is not the actual cost of the self funded plan, but it's worst case scenario. The employer that understands this will most likely see significant savings off this amount during the year.

For information about IMA and the company’s approach to designing cost-effective self-funded health insurance programs, please complete the form on the contact page.

For a separate article titled; Self-Funding An Overview & Explanation of Misconceptions,
written by Frederick D. Hunt, Jr., SPBA President, click here