For employers who find self-funding an entire healthcare insurance program too intimidating, self-funding ancillary benefits provides a way in.
If your medical plan is fully insured, switching to self-funding (and covering catastrophic claims) can be downright intimidating, even with stop-loss insurance. That’s why many employers are sticking a toe in the financial risk pool by self-funding ancillary benefits.
The most commonly self-funded ancillary benefits are dental and short-term disability, followed by vision. These employee benefits are relatively low risk. Chances are, your employees don’t typically use dental services much beyond bi-annual checkups and a filling here and there.
Short-term disability is a popular benefit for employees needing maternity leave. However, if you plan accordingly, these claims won’t drastically affect the benefit spend.
Self-funding ancillary benefits can save money and provide a greater level of transparency into how a benefits plan is performing. Here’s where you can save money: When insurance companies price products, they determine the premium by reviewing actuarial data + setting aside a portion to pay current claims + setting reserves that are used to pay future claims + making a profit. Why let the insurance company hold your reserves? By self-funding, you hold that money.
When you self-fund a benefit such as dental care, an underwriter will review your claims history, taking into account the number of people covered under the plan, and determine what your expected claims will be based on, with past data and future trends. You’ll set a budget that includes your fee for plan administration, based on your expected claims. We don’t recommend self-funding the benefit the first year you offer it.
What to Consider When Self-funding Ancillary Benefits
When self-funding short-term disability, depending on your comfort level, there are varying levels of help to administer the plan. Third-party administrators (TPAs) can handle the full range of managing a self-funded plan, such as adjudicating the claim, calculating the amount to pay and actually paying the claim. This takes some of the pressure off of plan sponsors who are completely new to self-funding, but, as with anything that conveys value, TPAs come at a cost. Therefore, you may choose to handle most of this responsibility yourself, including calculating the benefit and drawing the check. But before you make that decision, assess the availability and knowledge of your internal resources.
For both dental and short-term disability, compliance is key. Depending on how your plan is structured, you may be responsible for complying with state and federal regulations that your carrier handled previously. When setting up your plan, make sure you understand where responsibilities lie so you can remain compliant.
Risk should be your primary concern. Sure, this may seem obvious; for ancillary benefits such as dental and short-term disability, the risk is relatively low. Self-funding an insurance benefit means you should watch how the plan is performing more closely than you would if it were fully insured.
Example of Potential Savings with Self-funding Ancillary Benefits
For companies who weigh the risk and begin self-funding dental benefits, the savings can be very real. One company offered an employer-paid dental plan to its 420 eligible employees. The plan averaged 394 enrolled members over 18 months. During that same 18-month period, the employer paid $567,474 in premiums. The insurance company paid $481,617 in dental claims, equaling a difference of $85,857. Even after adding a $4.50 per employee per month administration fee to the claims cost, this employer would save nearly $54,000, or 9.5% of the total cost.
Medical costs continue to rise steeply. Self-funding some of your ancillary lines of coverage can give you greater insight into how your health & welfare benefits program is performing and help you save money.
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