Self-Funding is “too risky”….

There are so many myths about self-funding medical benefits it’s not even funny. Being “too risky” has to be the #1 objection I hear from employers when it comes to the topic.

I have a public sector client (County), and last year at a Commissioner’s meeting, I uttered the words, “Self-funding”, and before the words could pass my lips, a couple of County Commissioners were shaking their heads as if I had just suggested we all eat soap.

There is something especially provocative about self-funding medical benefits. The subject elicits strong reactions from employers, both ways. And from my experience, those employers who emphatically oppose self-funding simply misunderstand self-funding.

Take the County Commissioners. Their County hasn’t been self-funded in more than 30 years I know for a fact, perhaps even never. They have never experienced being self-funded as an organization. Knowing the two Commissioners, I know that neither of the men have ever owned, nor worked at an organization that was self-funded either.

So why such a strong opinion? Perhaps I should ask them.

Whenever I discuss self-funding, I start out very elementary, and pose two scenarios to employers and decision makers.

Scenario 1: Give an insurance company $1mm per year, no matter what your claims/utilization is.

Scenario 2: Give yourself #1mm per year, and retain whatever is saved/mitigated in claims/utilization.

When framed this way, I’m not sure I’ve ever had an employer tell me that the smartest thing to do is to give the insurance company the same amount of money and let them keep any surpluses. In fact, employers look at me quizically and say things like, “Well, when you put it like that….”, or “It’s not that simple, self-funding doesn’t work that simply….”, etc.

Well, actually, it does. Self-funded employers still purchase “insurance” to protect against large individual claims (specific stop-loss) as well as large volumes of claims across the entire organization (aggregate stop-loss). I can’t tell you how many times people have told me that they thought being self-funded meant the employer was on the hook for the “million dollar claim”….you know, the premature twins analogy, or the cancer analogy.

“One cancer claim will scuttle the entire company!!!!”….so on and so forth.

This is a fundamental misunderstanding of how self-insuring even works. Specific stop-loss “stops” a company’s losses on a single individual in the organization: ie, the cancer patient, the mother who delivered those premature twins. Companies purchase an insurance policy that “stops their losses” at a specific level, and that’s called the specific deductible.

Aggregate stop-loss “stops” a company’s accumulated losses on ALL company employees at a certain amount. This amount is called the Aggregate Attachment Point. If claims exceed that point, the aggregate policy reimburses the employer.

So, there are protections built in.

The irony of the County client I mentioned before is this. Instead of suggesting self-funding, knowing it would never get Commissioner approval in the first year or two they hired me, I recommended an HRA strategy where the County would reimburse plan members a significant portion of their deductible.

We offered a HDHP along with an HRA to reimburse $3000 of a $5000 plan deductible, so the County employee would effectively only have a $2000 deductible. This yielded over $500k of savings for the County in just the first year.

But why did they support this HRA strategy and not self-funding?

Well, the only thing I can think of is that it’s just hard to support something you don’t yet fully understand. I’ll keep educating them, and having conversations.

I’ll make one final point about the whole “self-funding is just too risky” objection. To me, fully-insured isn’t even “risky”, it’s a guaranteed loss. The employer is going to pay a set monthly premium, no matter what the claims utilization is. That is a guaranteed expense, whereas self-funding at least gives the employer the opportunity to spend less/save.

That’s why we speak so often about cost containment and risk management strategies. Employers are learning that a lot of healthcare expenditures can be better managed, even completely eliminated in certain circumstances.

I am confident that more and more employers will come to understand self-funding and stop loss protections as fully-insured plans continue skyrocketing in price. Employers are thirsty for solutions, and are learning that more insurance, or just a different fully-insured plan is not the answer.

Josh Butler

Josh is the President of Butler Benefits & Consulting. Passionate about healthcare reform and helping employers save money while improving the quality of employee benefits.

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