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How Does Self-Funding Work?

Self-Funding: A Comparison to Fully Insured Plans

Basically, everything that is provided in a conventionally fully insured program is duplicated in the protected self-funded plan. Everything that the insurance company does when it offers a conventionally insured program takes place in the partially self-funded program. The difference is that with the self-funded plan the employer holds the cash needed to fund benefits and instead of sending the fully conventional premium to the insurance company, only a small fraction o the conventional premium is sent in to a reinsurance carries. The employer purchases reinsurance or medical stop loss for protection, holds the remainder of the conventional funds (claim funds), invest them, and segregates them if desired.

Example A: (Fully Insured Example)

XYZ Company is fully insured with Fully Insured Carrier and pays a premium of $1,500,000.00 annually for their health insurance plan. Claims experience shows that XYZ Company only had $1,000,000 in claims and admin expenses. The Fully Insured Carrier keeps $500,000 in profits.

Example B: (Protected Self- Funding Example)

XYZ Company's group health insurance is self-funded with a Third Party Administrator with reinsurance. XYZ Company's potential worst case scenario for the year is $1,600,000 annually. XYZ Company pays $20,000 a month in fixed premium cost and holds in claims reserves a $1,360,000 for potential claims.

The $1,360,000 is retained by XYZ Company and it is theirs to utilize as they see fit until claims materialize. At the end of the year XYZ Company claims are $1,000,000. XYZ Company retains the $360,000 it reserved in a worst case scenario. XYZ Company realizes a $260,000 savings by going Self-Funded vs. fully insured.

The employer is protected by three facets of insurance protection:

• Specific deductible which protects against any one person claims exceeding a specified amount.
• Annual aggregate reinsurance to protect against claims greater than the conventional equivalent.
• Integrated aggregate (accommodation) which protects against any excess monthly claims (so the employer may budget and allocate only the conventional equivalent premium each month, then not have to worry about an adverse month when more than usual claims are presented).