Explanation of Shared-Funding and Self-Funding

 

 

Shared-Funding: A Health Plan Alternative

Shared-funding is a form of self-funding that functions very similarly to a fully insured policy, where the employer pays a set monthly premium. But unlike a fully insured policy, the employer retains any unspent claim funds. This approach allows even small employers to establish a monthly health plan budget and take advantage of the economic benefits of self-funding that many large employers have enjoyed for years. Here is how shared-funding works:

  • An employer pays a set amount each month during the twelve-month plan year to fund the plan; the monthly payment is determined for each employer based on a thorough underwriting review.
  • Part of the monthly payment is used to pay the fixed costs, e.g., stop-loss insurance premiums, administration fees, etc., and part is used to fund expected claims up to the employer’s funding limit.
  • Unlike insurance, if claims do not exceed the amount funded by the employer, the unspent claim funds are retained in the employer’s claim account.
  • In any given month, if actual claims exceed the cumulative amount funded by the employer for the year-to-date, stop-loss insurance funds the claims that exceed the employer’s funding limit.

Claims Funding & Stop-Loss Coverage

Shared-funding offers an employer a potential savings if actual paid claims are less than the claim funding level. More importantly, stop-loss coverage protects the plan when cumulative claims exceed the employer’s funding limit in any given month. For example:

  • If the employer’s monthly claim funding limit is $40,000 a month and total claims payments for the first two months of the year total $90,000, the stop-loss carrier will fund the $10,000 in excess of the employer’s funding limit.
  • Through month three the employer will have funded a total of $120,000 (i.e., three months at $40,000). If total claims payments for the plan total only $110,000, then $10,000 will be returned to the stop-loss carrier.
  • At the end of the plan year, the employer will have funded no more than the $480,000 funding limit (i.e., 12 months at $40,000). If claims payments are less than $480,000, the employer will retain the funds. If claims exceed $480,000, the stop-loss insurance carrier will have funded claims in excess of the employer’s annual funding limit.

Plan Operation

A shared-funded plan is easy to set up and simple for the employer to operate. Each month, the employer makes a set payment and updates the third party administrator on any plan enrollment changes that have occurred. The employer makes the set monthly payments to a bank account that is set up for the employer at the stop-loss insurance company’s bank. This setup allows the insurer to promptly provide funds for any claims that might exceed the employer’s claim funding limit. All claims are actually paid out of the employer account – even those that the stop-loss insurer funds. The stop-loss insurer transfers any funds that might be required to the employer’s bank account.

         The third party administrator does the following:

  • Bills the employer monthly
  • Provides ID cards, a plan document, and summary plan descriptions for employees
  • Handles all claims processing and produces checks to pay claims
  • Provides customer service for all inquiries or questions from the covered persons, providers, and the employers
  • Offers 24/7 access to detailed information about benefits, eligibility, and claim status on the covered persons

Not just for large employers, advantages for small employers

Shared-funding is designed to allow employers with as few as 25 employees enrolled in their health plans to consider this unique self-funded approach. With shared-funding, a set monthly funding level is established that can be budgeted – much like a premium. This approach allows smaller businesses to take advantage of the economics of self-funding. For example, state premium taxes are not assessed on claim payments, and if claims do not reach the funding limit, the employer, rather than an insurance company, retains the excess funds. Often the fixed costs of operating a self-funded plan are lower than the fixed costs that are included in a group health insurance premium.

 

Summary

  • Self-funding treats predictable claim costs as expenses rather than as insurable risk items.
  • In a self-funded plan model, we help employers determine the amount of risk that is appropriate for their company.
  • Employers purchase stop-loss insurance to protect against catastrophic claims.
  • Risk charges, insurance company reserves, and most premium taxes are avoided.
  • Self-funded plans are governed by ERISA instead of state insurance law.
  • In a self-funded plan, the employer can either fund expenses as they come due or deposit expected or maximum costs into an account each month.
  • As benefits specialists, we help design the plan, secure appropriate levels of stop-loss coverage

 

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