Once limited mainly to large companies, self-funding is now becoming accessible to even smaller employer groups. This is big news and a great opportunity for smaller companies. The Affordable Care Act is changing the landscape of health insurance and options that once seemed very risky and unsuitable for small businesses are now being considered as viable options.
Community rating
As of Jan. 1, 2016, the definition of small employer is classified as employers who have fewer than 100 employees. The impact to rates for these employers in the 51-99 employer market will be dramatic.
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This is similar to the recent past when the employer groups with 50 or fewer employees moved to this same rating methodology. Insurers will be required to use “adjusted community rating” when setting premiums for individual and small-group plans sold on the exchanges and the private market. This means that insurers can’t consider health history in determining premiums, instead, carriers may only look at age and demographic regions when offering coverage to small employers (those who have under 99 employees).
Self-funding
With a self-insured plan, an employer sets aside funds to cover employee health claims, rather than paying set per-employee premiums to an insurance carrier. These plans are not subject to the ACA’s community-rating requirements.
Insurers are now beginning to offer self-funded plans to small businesses with as few as 10 employees. Insurers with small group self-funding products predict substantial growth over the next several years, especially in businesses with younger and healthier employees.
Level-funding
One of the more popular products being utilized in the small groups market is “level- funding.” A level-funded self-funding product is right in the middle of the insurance scale. The product is considered a hybrid between fully insured and self-funding. It allows an employer to have a self-funded plan in place and reap all of the benefits without all of the risk, especially when this product is purchased from an integrated carrier. It is considered a conservative approach that has safeguards in place to make it appear and act like a fully insured plan, but the platform is self-funded.
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In a level-funded plan, an employer group pays a set monthly premium to an insurance carrier, similar to a fully-insured plan. The insurance carrier handles the administration. If the group has a favorable medical loss ratio, the surplus could either be fully refunded to the employer or split between the carrier and employer at the end of the year.
More considerations
Other reasons companies are exploring self-funded health benefit options include:
- Eliminating carrier profit margins and risk charges
- Avoiding taxes and fees mandated by the Affordable Care Act – Roughly a 1-3% addition to premium costs.
- Avoidance of compliance with the essential benefits mandated by the ACA. Self-funded plan designs can be flexible and built specifically with your employee population in mind.
- Including health of the population used as a factor in underwriting, which can result in a favorable premium if the population is a young, healthy group with good claims experience.
- Claims and utilization transparency. Manage and reduce costs by utilizing transparent data, engaging/educating employees and customizing wellness programs.
