5 reasons for employers to consider a self-funded health benefits plan

This piece is sponsored by Holmes Murphy.

Think about it from the perspective of a business owner or chief financial officer: Your health insurance is one of the biggest cost drivers in your business, and in many cases, you can’t do much to control it.

“If you’re in a fully insured plan, it’s like your health benefit is in a black box,” said Jordan Anderson, vice president and employee benefits sales leader in the Sioux Falls Holmes Murphy office.

“When you become self-funded, you see how your plan is truly running. There’s tremendous opportunity for cost control, cash flow advantages and customized benefits designed for your specific workforce. And it all starts with access to data.”

For many employers, that shift turns health benefits from a fixed expense into a strategic business decision.

If your business has more than 75 employees — and in some cases as few as 50 — it may be worth exploring whether a self-funded plan is a fit.

Here are five potential advantages:

1. More transparency and data

In a fully insured plan, employers often have limited visibility into what’s driving costs.

Self-funding changes that.

“You can see what medical conditions are driving costs, identify high-cost claimants and understand chronic conditions impacting your employees,” Anderson said.

That level of insight allows employers to make informed decisions instead of assumptions — whether that’s addressing high emergency room usage, managing pharmacy spend or investing in preventive care.

“Until you see the data, you don’t know,” Anderson said.

2. Who benefits when claim costs go down?  You do!

In a fully insured model, carriers are required to spend a large portion of premiums — typically around 85 percent — on claims and related quality-improvement costs. The remaining 15 percent is used for administrative costs or becomes profit.

That structure can limit incentives to aggressively reduce overall spending: Carriers are not directly rewarded when total claims go down. The carrier’s margin is tied to a percentage of total premium, not to how efficiently care is delivered.

“Fifteen percent on $1 million in fully insured premium looks better than 15 percent on half a million,” Anderson said.  “That doesn’t mean carriers don’t manage costs, but it does mean employers have limited control in a fully insured environment. The carriers aren’t necessarily doing creative things to keep member costs low.”

In contrast, self-funded employers directly benefit from controlling costs.

That creates stronger motivation to:

• Evaluate lower-cost, high-performing networks.
• Introduce cost-containment strategies.
• Invest in prevention and early intervention.

“If your plan performs well, you have flexibility,” Anderson said. “We’ve seen employers offset future increases or even implement premium holidays for employees.”

3. You’ll have ways to limit risk — while improving cash flow

One of the biggest misconceptions about self-funding is that employers take on unlimited risk.

In reality, most plans include protections.

“You’re not truly taking on the risk of catastrophic claims,” Anderson said. “Stop-loss insurance steps in once claims reach a certain level.”

That means large, unpredictable costs — such as cancer treatments or NICU care — are capped.

At the same time, self-funding offers a different cash flow model.

Instead of prepaying for medical or pharmacy claims through a fixed premium model, employers pay claims as they occur.

“You’re paying as you go,” Anderson said. “You’re not prepaying for expenses that may or may not happen.”

That allows businesses to:

• Keep cash in the business longer.
• Build reserves strategically.
• Benefit when claims are lower than expected.

For some employers, benefit captives — where multiple employers share in catastrophic risk — provide another option to further spread exposure.

4. Your business benefits from Rx rebates — not the insurance carrier

Prescription drug pricing is one of the least-transparent areas of health care.

In a fully insured plan, rebates from drug manufacturers often are retained by pharmacy benefit managers or carriers.

“With a high-cost drug, the list price might be $2,000, but after rebates, the net cost is much lower,” Anderson said.

In many cases, employees still pay based on the higher price, while the rebate is kept elsewhere.

In a self-funded plan, employers have more control over how those rebates are used.

“You as an employer see the benefit of those rebates and then have more say in how those dollars are applied,” Anderson said.

That could mean:

• Reducing employee out-of-pocket costs.
• Offsetting plan expenses.
• Reinvesting in benefits.

5. You can focus on what matters most to your employees

Self-funded plans offer flexibility to design benefits around your workforce — rather than relying on a one-size-fits-all approach.

“You have more say in a self-funded arrangement than a fully insured model,” Anderson said.

That can include customizing:

• Deductibles and copays.
• Provider networks.
• Coverage for specific services.
• Pharmacy benefit structures.

It also allows employers to target high-impact areas.

“The highest-cost chronic conditions are cancer, musculoskeletal issues, cardiovascular disease and diabetes,” Anderson said.

“We’ve also seen companies with workers in physically demanding jobs introduce virtual physical therapy, so their employees can access those services outside of work. It keeps employees productive and on the job.”

With data in hand, employers can introduce solutions such as preventive screenings and early-detection programs and targeted wellness initiatives.

“If you can detect something earlier, you’re improving outcomes and potentially reducing costs,” Anderson said.

Know the limitations

There isn’t all upside to self-funding.

“There’s still risk volatility,” Anderson said. “A few large claims can spike costs, especially for smaller groups, and while stop-loss helps, it doesn’t eliminate all variability.”

There also are additional administrative responsibilities. Most companies work with a third-party administrator to manage the plan.

“There is more involvement on your end as the employer, versus a ‘set it and forget it’ fully insured plan,” he said.

For smaller organizations, there are still options.

Holmes Murphy can connect businesses to captives — self-funded arrangements that allow multiple employers to share risk.

“That can allow you a path to self-funding or access to stop-loss by spreading risk,” Anderson said.

Next steps

If you’re considering a self-funded benefits plan, now is the time to start the conversation.

“A good time to begin is 120 to 150 days before your renewal date,” Anderson said.

That allows time to evaluate options, understand the risks and align your benefits strategy with your broader business goals.

“At Holmes Murphy, we sit down and talk through what you’re experiencing today and what your strategic goals are,” Anderson said.

“Self-funding can be a great fit, but it’s important to understand both the upside and the variability — and make sure it supports your long-term strategy.”

If you’re interested in learning if self-funding is an option for your business, simply reach out to Holmes Murphy.