I know it probably goes without saying, but most employers I talk to don’t actually understand exactly what goes on when they pay a health insurance premium in a fully insured Health Plan. They simply complain every year because they keep getting a rate increase. Would you like to maximize your cash flow in your health plan?
Essentially, there are three (3) “buckets” that insurance premiums are divided into:
- Fixed costs: these include the cost of administration, underwriting expense, premium taxes and other fees, as well as underwriting profits (and possibly commissions).
- Reserves: in a fully insured plan, reserves are required by every state to pay for claims that were incurred prior to termination, but actually paid after termination of a health plan or insurance company. Usually they’re referred to as “runout claims” or IBNR (Incurred But Not Reported).
- Claims: in a fully insured plan an employer actually “pre-funds” their expected claims to an insurance company within the premium. The insurance company in turn, pays claims from this “bucket” when members incur them.
By “pre-funding” claims in an insurance premium with a fully insured plan, the employer is allowing the insurance company to benefit from cash flow and the use of the employer’s money. While the premium is predictable month-to-month, it gives all of the use and control to the insurance company. By the way, the insurance company doesn’t refund any unused balance.
If you want to maximize cash flow for your health plan there are two (2) basic ways to do so:
- Partial self-funding and,
- Level Funding
Partial Self-Funding allows an employer to maximize cash flow by funding claims, only if and when they occur. Employers do not pay any monies to insurance companies or administrators for claims unless they actually occur, thereby gaining control of their plan and finances. Additionally, employers hold the reserves rather than once again, giving that money to the insurance companies. Stop loss coverage can be purchased to protect the employer against any large claims or high-frequency of claims.
Level Funding works a little differently than a partially self-funded plan. A “fully insured equivalent” premium is paid to an insurance company, so in a sense the employer is “pre-funding” the claims account. However, Level Funding affords the employer a refund of any claims surplus at the end of the year left in the claims “bucket.” While this gives the insurance company claims funding in advance, at least it provides the employer with a refund of unused claims. Stop loss coverage is also purchased in these plans.
I would invite you to explore these alternative methods to fully insured arrangements. The actual plan of benefits offered to employees can remain the same if you choose, it’s just a different method of paying claims. It is obviously working for employers because the Kaiser Family Foundation reports that in 2020 67% of covered workers in small firms and 84% of workers in large firms, are enrolled in plans that are self-funded.
