SELF-FUNDING

FOR SMALL
BUSINESS
A WAY TO MANAGE HEALTHCARE
COSTS AND EXPAND OPTIONS
The popularity of self-funded group healthcare plans continues to rise.
Already immensely popular with large employers, small businesses continue
to embrace self-funding as a remarkably effective way to manage costs,
navigate changing regulations, and expand medical plan options.
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INTRODUCTION

The genesis of self-funding’s popularity amongst

smaller employers can be traced back to the 2017 SELF-FUNDING STATUS
Affordable Care Act. When the ACA was enacted back From the 2017 UBA Health Plan Survey
in March of 2010, its requirements prompted many small to
mid-size companies to re-examine how they were offering ­—
12.8%
and funding — employee benefits. 12.5%

Self-funding used to be considered an alternative funding method

that was ONLY feasible for large companies who could take on
greater risks and handle cash flow fluctuations in exchange for
upside savings potential. Self-funding, after all, is a mechanism
by which companies are essentially insuring themselves. 2016 2017

With the advent of the ACA, the benefits of self-funding Overall have a self-funded plan
expanded beyond just those of potential financial upside. The
benefits of the transition are now far more reaching, and now
benefit employers and employees alike.
60.9%
Because of this, small and mid-size employers have been taking
the plunge into self-funded group medical plans in large numbers.
And as the industry has continued to evolve, self-funding among
small groups has become quite common.
Less than 2/3 of all large employers’
(1,000+ employees)
GREATER RISK AND GREATER REWARD plans are self-funded
In a self-funded plan, the employer — not the insurance carrier
— assumes the risk and cost fluctuations associated with its
healthcare plan. Plan costs can fluctuate by month (or even by
week), depending on the medical claims submitted by the
company’s employees.

The upside for self-funded employers is that they can
save money in good plan years. Rather than pre-paying
a flat rate medical premium to an insurance carrier in
a fully funded scenario (regardless of actual claims
and plan utilization), a self-funded employer retains
the claim reserves traditionally held by insurance
companies, and thereby also retains the interest on
those reserves.
With the advent of the ACA, the benefits
of self-funding expanded beyond just
those of potential financial upside. The
benefits of the transition are now far more
reaching, and now benefit employers and
employees alike.

In other words, if the premiums retained through employee contributions (assuming they share,
as most employees do, in the premium expense), plus the premiums that would have otherwise
been paid to the carrier in a fully funded scenario, exceed claim expenses, then the employer
comes out ahead.

SELF-FUNDING FOR SMALL BUSINESS

A WAY TO MANAGE HEALTHCARE COSTS AND EXPAND OPTIONS
©2019 JP Griffin Group. All Rights Reserved
 1 2 3 4 5

INTRODUCTION

PROTECTING THE DOWNSIDE

That being said, it is possible for self-insured employers to spend 2017 SELF-FUNDING GROWTH
more money than a fully funded company on medical coverage From the 2017 UBA Health Plan Survey
in years when their employees suffer major illnesses. It’s because
of this that self-funded companies should budget for max-liability
scenarios, which should be carefully modeled-out and forecasted
by a licensed benefits advisor. for employers with
48% 25-49 employees
This does not mean, however, that a self-insured employer leaves 5.8% OF PLANS
themselves vulnerable to a catastrophic expense which could
decimate their business. This is probably the most common
misperception about self-funding. for employers with
50-99 employees
The risk of catastrophic downside can be neutralized through 13.4%
9.3% OF PLANS
stop-loss insurance, which is designed to insulate self-funded
companies from runaway healthcare claims. Stop-loss insurance
reimburses self-funded companies for claims exceeding
predetermined levels, either on an individual claim or
aggregated claim level. (More on stop-loss coverage later.)

So long as self-funded companies practice good financial discipline and look at self-funding over
a longer time horizon than year-to-year, most companies find it advantageous to self-insure. But
these employers should make sure to work with an employee benefits broker with a talented
underwriting department.

Brokers can help employers forecast claims and insurance costs for the next year, allowing for better
cash flow and benefit planning. Most importantly, self-funded companies should always budget for
max liability and set aside reserves from well performing plan years to offset what is sure to be a
“poor” plan year every now and then.

By contrast, a fully insured (or traditional group) plan relies on the insurance carrier to assume
the risk and plan administration. With a fully insured plan, an employer’s premium rate is fixed for
an entire year according to enrollee count each month; monthly premium changes only if enrollee
count changes.

While a fully insured structure allows for more predictable health plan expenditures, in the form
of monthly premium, it also removes any financial upside an employer might accrue in a good
plan year. Furthermore, it does not protect an employer from year-over-year increases in medical
premium, which are sure to follow if the employer’s medical claims for the year exceed what the
carrier had projected.

As you can probably imagine, self-funded plans work particularly well with companies who have a
younger, healthier workforce, especially since fully insured community-rated plans under the ACA
don’t give small employers any credit for a healthy population. That said, even employers with less
than stellar workforce population health metrics should take a look at self-funding.

SELF-FUNDING FOR SMALL BUSINESS

A WAY TO MANAGE HEALTHCARE COSTS AND EXPAND OPTIONS
©2019 JP Griffin Group. All Rights Reserved

ADVANTAGES OF SELF-FUNDING
SELF-FUNDING MEANS GREATER
PLAN DESIGN FLEXIBILITY
In addition to cost savings, self-funding offers more control
over the dynamics of plan design. With fully insured plans,
plans and standard benefit options are filed by each
insurance company with every applicable regulatory body,
and typically offer limited flexibility.
But with self-funded plans, an employer has significantly
more flexibility in plan design, often only limited by the
capabilities of their third-party administrator (TPA). In
addition to adjusting more typical plan design features such
as copays and deductible, employers may be able to select
location-specific networks, utilize high performing networks
driven by plan design, select a specific PBM (pharmacy
benefit manager), customize their prescription drug
formulary, and incorporate wellness programs aligned
with the underlying plan design.
Self-funding also allows employers the freedom to
unbundle services, which often drive costs. These
include, but aren’t limited to stop loss, pharmacy benefit
management, reserve building, case management, and
claims processing. Unbundling brings about far more
transparency of costs, which otherwise can get buried
in the underlying cost of these components.
SELF-FUNDING MEANS LESS
BURDENSOME COMPLIANCE
For employers who are looking to avoid the added cost
and compliance burdens brought about through healthcare
reform, self-funding can be an effective antidote to the
mandates and fees associated with the ACA. Self-funding
is also known as reinsurance.
One example of costly regulation that self-funding avoids
comes in the form of “community ratings”. Beginning in 2014,
the ACA required fully insured plans with fewer than 50 lives
to adhere to “community rating” rules, which meant that the
cost of insurance would not be based on health factors.
SELF-FUNDING FOR SMALL BUSINESS
A WAY TO MANAGE HEALTHCARE COSTS AND EXPAND OPTIONS
©2019 JP Griffin Group. All Rights Reserved
1 2 3 4 5
PROS OF SELF-FUNDING
Potential for significant savings (on fixed costs
such as administration and insurance costs
for catastrophic claims). An employer should
realize 5% to 8% lower cost with a self-funded
program
5+% reduction in ACA and premium taxes
compared to a fully insured plan and the
elimination of fully insured plan profit margin
Greater flexibility in plan design and avoidance
of most or all state mandates
Greater potential for employee and employer
engagement
Ability to evaluate each component of the plan
separately
Vastly increased knowledge of the plan, its
claims experience, and component costs
(HIPAA protected)
Ability to install wellness, biometrics, bundled
pricing, direct contracting, etc., to reduce
claims costs on a direct basis
Greater ability to save money through use of
telemedicine providers (which is becoming an
important trend for the future)
Much greater ability for the HR department to
act in a strategic and consultative manner
Greater ability to create special networks,
centers of excellence, and potential medical
tourism
Ability to look at enhanced reference-based
pricing and value-based insurance design
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ADVANTAGES OF SELF-FUNDING

In fact, rates could only vary by age, tobacco use, self

only or family coverage, and region. Beginning in 2016, the
community rating rules were adjusted to allow states to apply
the community ratings, should they so choose, to fully insured
plans up to 100 lives. Self-funded companies are allowed to
steer clear of community ratings altogether.
Another example of a regulation self-funding avoids involves
“essential health benefits”, which the ACA identifies as 10
benefit categories that must be included as essential health
benefits in small group, fully funded medical plans. Essential
health benefits limit flexibility and drive up costs. Self-insured
plans (along with coverage offered in the large-group market
and through grandfathered plans), are not required to cover
these essential health benefits. It should be noted however,
that these self-funded plans must still meet the ACA's
requirements to provide "affordable" coverage that offers
at least "minimum value."
CONS OF SELF-FUNDING
Chance for higher costs due to unpredictable
claims experience
HMO plans replaced by potentially less
economically-efficient EPO plans (such as an
HMO on a PPO chassis)
More employer engagement required to
optimize effectiveness
Self-funded plans can be more complicated
at the employer level (but generally not for
employees)
Less predictable cash flow, and IBNR runout
issues (such as reserve calculations)

Finally, self-funding provides tax relief, as some states don’t Asset exposure to fund claims
tax premiums on self-funded plans. Additionally, self-insured
plans are exempt from the ACA’s medical insurance premium Internal Revenue Code §105(h) discrimination
excise tax. testing that applies to self-funded plans only

STOP LOSS INSURANCE MAKES
SELF-FUNDING FAR LESS RISKY
By its very definition, a self-funded plan takes on risks. Only
very large employers assume all of the risk associated with
self-funding — the majority purchase some form of stop loss
insurance (commonly referred to as reinsurance).
Wellness and biometrics (if instituted) might
cause employee morale issues if not handled
correctly
More technical expertise required on the part
of the advisor/consultant

Stop loss insurance can be purchased in two forms; individual stop loss (also known as specific
stop loss) and aggregate stop loss (also known as total claims coverage). It is very important that
an employer purchase the appropriate level of individual and aggregate stop loss and even more
important that they purchase this from a quality vendor. Working with a knowledgeable broker to
identify and strike disadvantageous terms and conditions from a contract is always a good idea.

Evaluating the quality of a stop loss contract is perhaps the most important task a benefits
advisor can provide to a self-funded company. A good advisor will deploy risk management
techniques to compare the premium for the stop loss coverage to the level of risk their client is
willing to assume. Matching these risk corridors with the terms of the contract will ensure that
the plan matches the strategy.

SELF-FUNDING FOR SMALL BUSINESS

A WAY TO MANAGE HEALTHCARE COSTS AND EXPAND OPTIONS
©2019 JP Griffin Group. All Rights Reserved
 1 2 3 4 5

WELLNESS TAKES ON MORE

IMPORTANCE WITH SELF-FUNDING

Because self-funded companies are essentially

insuring themselves, and because lower claims
expenses directly benefits the bottom line,
wellness programs are extremely important in
making a self-funded program more successful.
It’s important to note that wellness programs should be
customized to address the short- and long-term goals of
a self-funded employer. For example, it’s quite possible
that a wellness program could add costs in the short term,
especially if it’s effective in promoting the utilization of
more preventative care services than in the past (and
the subsequent expense that goes along with this).
After all, preventative care, including adherence to age-
appropriate screenings and immunizations, is often the
best defense against the onset of chronic conditions and
otherwise undetected illnesses that can lead to exorbitant
medical claims. In a best-case scenario, a well-developed
wellness program can actually help individuals maintain
or lower clinical risk factors and help avoid associated
medical claims.
Population health analytical tools should also be deployed,
when possible. In smaller companies, this is typically only
possible if the firm is self-funded. (Rarely will carriers share
claim data with companies with less than 100 covered lives
in a fully funded environment.)
CONS OF SELF-FUNDING
The employer or plan sponsor insures the
members, not the insurance company or
stop loss carrier (this makes tying the
plan document to the stop loss carrier’s
exclusion critical)
Insurance carrier or health plan tools and
resources for wellness, etc., might not be
available if self-funded (some of the tools
might be available if that provider’s PPO
network is rented)
Somewhat increased reporting requirements
(ACA tracking, state compliance ongoing
work, etc.)
Stop loss coverage can be more price-
sensitive to ongoing claims than a fully insured
program
Potential to purchase the wrong type of
contract that could expose an employer to
unintended or unforeseen costs

For self-funded companies large and small, solutions
exist which help employers to identify and target
the “ticking time bombs” within their organizations.
These may include individuals who have undiagnosed
conditions, as well as those who have been diagnosed
with chronic conditions but are care or medication
non-adherent.
In a best-case scenario, a well-developed
wellness program can actually help
individuals maintain or lower clinical
risk factors and help avoid associated
medical claims.

Take, for example, a cohort of individuals who have been flagged through biometric screenings with
hypertension. When married with medical usage data which illustrates that some of these individuals
aren’t seeking treatment, either from ignorance or lack of follow-thru, employers and care providers
can develop a (HIPPA compliant) plan of action to improve the situation. In doing so, they can head
off a condition which could otherwise lead to heart attacks, strokes, coronary heart disease, heart
failure, kidney failure and more. In other words, precisely the catastrophic health claims you want to
avoid whether you are self-funded or not.

SELF-FUNDING FOR SMALL BUSINESS

A WAY TO MANAGE HEALTHCARE COSTS AND EXPAND OPTIONS
©2019 JP Griffin Group. All Rights Reserved
 1 2 3 4 5

LET YOUR EMPLOYEES KNOW ABOUT

THE TRANSITION TO SELF-FUNDING

Once employers make the switch to self-funding, it’s generally a good idea for
them to inform their employees. Once the workforce understands that their behaviors, as they
relate to being responsible consumers of healthcare, can favorably or unfavorably impact the bottom
line (e.g. more money for salaries, bonuses, additional staff), employers will start to notice a change.

It’s not unlike the care one takes in renting a car vs. borrowing one from a friend, or the way people
choose items at an ala carte vs. all-you-can-eat buffet. A shift in mindset will set-in once employers
educate their workforces on how to become better consumers of healthcare and better stewards of
their personal health.

Note that this is not to suggest that employers should attempt to suppress healthcare consumption.
Quite the contrary. Rather, it’s merely to suggest that the gap in consumer-directed health information
is quite large – and taking the time to educate a workforce on how to comparison shop on price and
quality for medications and medical procedures, just as one example, can go a long way to impacting
medical cost. So too can making an investment in best-in-class communication and decision-support
tools, as well as incentives for the adoption of telemedicine, preventative care, and other valued
healthcare behaviors.

Finally, when communicating the transition to self-funding, employers should position the change as
something that is being done FOR everyone at company, rather than TO everyone at the company.
Demonstrating this through a new incentive or benefit (even one that is completely voluntary) can
go a long way in cementing this idea in the company culture.

Once employees are engaged and on board, small businesses are poised to make a smooth transition
to a funding strategy that will allow them to create a flexible and cost-effective healthcare plan.

SELF-FUNDING FOR SMALL BUSINESS

A WAY TO MANAGE HEALTHCARE COSTS AND EXPAND OPTIONS
©2019 JP Griffin Group. All Rights Reserved
 1 2 3 4 5

WORK WITH US

ABOUT THE JP GRIFFIN GROUP

The JP Griffin Group is a nationwide group employee benefits consulting firm that specializes in
the design, implementation, and management of complex multi-site, multi-state employee benefit
programs. We work with both fully insured and self-funded companies to deliver innovative, impactful
and tailored benefit solutions through fact-based strategic planning, insightful and actionable
analytics, leading-edge automation solutions and awardwinning communication materials.

We measure our success by our ability to ease our clients HR administrative and financial burdens,
while at the same time delivering truly competitive employee benefits packages that assist our clients
in employee recruitment and retention.

We work with a diverse set of clients, which span 47 states as well as the District of Columbia. Our
clients range in size from 25 to 4,000+ employees. The majority of our clients are geographically
dispersed with varied compensation tiers, diverse demographics, multicultural talent pools, bilingual
language requirements, and unique funding arrangements.

SELF-FUNDING FOR SMALL BUSINESS

A WAY TO MANAGE HEALTHCARE COSTS AND EXPAND OPTIONS
©2019 JP Griffin Group. All Rights Reserved