The 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 having risen 255% in the past 20 years.

Many organizations look to changing their contribution structure or changing 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 help 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 organization 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.