Intro to Self-Funding
With current health care cost trends, corporate management should explore every possible area of cost savings and containment. For years, many larger employers have self-funded their health plans to improve cash flow and to better control the costs of providing benefits.
Now, with the increasing availability of aggregate and specific stop loss reinsurance, smaller employers can take advantage of these cash flow savings and lower costs by self funding. Very simply stated, self funding treats predictable medical claims as an expense, rather than an insurable item. As a result, immediate cost savings are generally realized by elimination, or reduction, of premium taxes and risk charges on these predictable claims.
The previous roadblocks to self funding have been regulatory issues and the concern that unexpected claims could place too great a financial burden on an employer.
For many years most state insurance departments took the position that employers who self funded were in the insurance business and thus subject to the same regulations and premium taxes as insurance companies. Section 514 of ERISA, with its preemption of state regulation of employee benefit plans, eliminated this hurdle for self funded employers.
The concern by employers that they could face seemingly unlimited liability as a result of excessive claim costs due to such events as catastrophic loss, epidemics and unexpected high incidence of claims has been eliminated by stop loss insurance. Because of this, an employer knows at the beginning of the benefit year exactly what the worst-case cost could be by self-funding their health plan, and works to achieve better results.
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