It’s a widely known and accepted premise: insurance companies charge a premium for assuming the risk of a healthcare plan. A profit margin is baked into their fees to reflect this risk – that a customer’s overall healthcare bills will be larger than anticipated, that there may be a catastrophic medical event or events. In good years, an employer’s single integrated vendor makes money on your company’s bundled plan. It’s also widely known that in years when your company has higher than expected claims, you are virtually guaranteed that your premiums will go up the following year by more than just the projected claims trend.
When your company is self-insured, this risk premium is eliminated and your company accrues the savings. In addition, if claims come in under what was anticipated, then your company automatically reaps the savings from lower claim expenditures. In a bad year, although your claims costs go up, the following year’s budget will generally increase by a lower amount than the premium increase under a fully-insured plan because the insurance company will always add on a profit margin in excess of the expected claims growth.
The basic idea of self-funding is to take a longer term view of three to five years and reduce the cost of your healthcare benefits plan over this time horizon. Generally, a company will have a bad claims year once every three to five years. The idea is to make sure that in the good years, your company did not over insure and significantly reduce your savings. In this manner, if your claims experience is good, you get to reap the majority of the savings so that in the bad year, the savings realized over the good years more than offsets the bad year.
To learn more about the benefits of self-funded healthcare plans, download our white paper Maximizing Your Company’s Self-Funded Healthcare Benefit Plan today.