The Pros and Cons of Health Benefit Funding Methods

Family of Four Learning Pros and Cons of Health Benefit Funding Methods

The Kaiser Foundation estimates that the average annual health premium for family coverage this year is more than $20,576. While that number alone is staggering, what is truly appalling is that annual health premiums have risen 255% in the past 20 years.

Many organizations look to change their contribution structure or change their benefit plan to lower their costs – until their next renewal comes around. Contrary to popular belief, cost isn’t necessarily about your plan – funding methods have a large impact on cost, and there are pros and cons to every approach.  While not every funding method makes sense for every organization – it’s worth the examination of pros and cons to make sure your funding method, is the one that meets your organization’s needs and benefits your bottom line.

Fully-Insured Health Plans

Fully-insured health plans provide a fixed amount for an employer throughout the term of the health plan year. Small and mid-size businesses are typically fully-insured.

Pros:

  • Fixed monthly premium amount; only variance is typically by a change in census population
  • All claims are managed by provider
  • Low volatility in risk and claims expenses
  • Responsible for INBR claims at termination
  • Ease of carrier or merger/acquisition transition

Cons:

  • Premiums costs can be high
  • Highest potential for renewal increases
  • Lower claims savings stay with the carrier
  • Limited reporting transparency and control of factors affecting costs
  • Burdensome regulatory environment
  • Tax burdens can be higher

Self-Insured Health Plans

Self-funded health plans give an employer control of their costs through transparency in claims data, which helps identify cost savings opportunities.  According to the Kaiser Foundation, 61% of employers with 1,000 or more employees self-fund.

Pros:

  • Greater plan design flexibility
  • Employer pays only for actual claims
  • Stop-loss insurance mitigates financial risk
  • Claims and usage data analysis can improve control of risks and costs
  • Removal of insurer profit from spend
  • Lower state regulatory burden
  • Potential for lower fixed costs

Cons:

  • Variable monthly cash flow, based on claims
  • Employer responsible for all claims and services
  • Higher compliance requirements for HIPAA/other applicable federal laws
  • Savings are not always immediate
  • Reserves needed for INBR if plan is terminated

Medical Captives

 Medical Captives are comprised of a number of separate companies and organizations who maintain their own individual health plan based on their specific needs while mitigating risk through the large number of participants.

Pros

  • High-plan design flexibility
  • Avoidance of unanticipated rate increases
  • Data, cost and communications transparency
  • Pooling of claims to control volatility and cash flow
  • Potential for underwriting profit and investment income
  • Access to reinsurance and coverage for typically uninsurable activities

 Cons

  • Capital must be raised and is at risk
  • Some tax advantages have been reduced
  • Quality of service issues with third-party administration
  • Potential barriers to entering and exiting the insurance pool
  • Primary expertise resides with a captive manager, who must be chosen carefully.