Although self-funding has historically been a popular choice among large group employers, interest in it has grown in recent years. The interest has spiked particularly in smaller and mid-size groups, which may not have considered the self-funding option in the past.
Among fully insured employers with 50 to 999 employees, there are various levels of interest and opportunity. Sun Life’s research among employers shows that 36 percent of fully-insured employers in the small group market (under 250 employees) and 46 percent of mid-size employers (250-999 employees) would consider self-funding. These groups are further divided among those who range from definitely switching to interested but have no plans to move, and other levels of interest in between.
The advantage of increased control over medical benefits plan design and potential cost savings have led small and mid-size employers to explore the option; however, they are looking for guidance to better understand the potential risk and, ultimately, decide whether self-funding is right for them.
One of the major hurdles employers face when considering the self-funding transition is weighing the benefits of cost savings against financial risk. In recent research among employers and brokers, we found that while about 47 percent of employers view cost savings as the biggest motivation to self-fund, 49 percent find overall financial risk to be the biggest challenge. About 40 percent were also concerned more specifically with the unpredictability of high-cost claims.
Among brokers, 81 percent reported that their clients are attracted to self-funding because of the potential cost savings, while 77 percent reported that their clients’ main barrier to conversion is fear of financial risk.
With cost savings and financial risk weighing almost equally on employers, what is missing from the conversation to tip the scale toward self-funding and stop-loss?
Engaging in conversation
The first step is making sure employers understand how self-funding works. Many who are hesitant to convert say they simply don’t know enough about self-funding to feel comfortable making the switch. Brokers, too, have noted that employers’ lack of understanding is the secondary barrier to conversion, just behind financial risk.
Employers depend upon expert advice from their broker consultants to fully understand their benefits options and strategies for plan design and cost-containment potential.
When converting to self-funding, the shift to directly paying for employees’ health claims versus a fixed premium may be concerning. It is crucial to help them outline a long-term strategy. Employers need guidance on a spectrum of issues, from how to properly prepare to meet their self-funded plan’s cash flow needs, to examining the long-term cost-containment opportunities. This guidance should also include a stop-loss discussion detailing how to manage the risk of large, unpredictable claims. Self-funding is a long-term decision and employers are likely to think about how making the switch may play out over multiple years.
Preparation for these discussions is key. Examine the potential client’s risk tolerance, cash flow needs, and claim history to identify potential cost drivers and risk management solutions. This will help shape the conversation to address the specific needs of each client.
Our research showed that 83 percent of employers spent anywhere from six months to two years discussing self-funding — without a broker. However, once they engaged in the self-funding conversation with a broker, 72 percent of the employers who switched to self-funding did so within a year.
Just as employees need decision support to make the right benefits choices, employers need education and guidance when considering the switch to self-funding. Some of the methods brokers have found useful in helping a client transition include providing a detailed analysis of claim administration approaches, product features to help transition, and an analysis of stop-loss coverage and carrier options. Data analysis of claim patterns can provide guidance around plan design and coverage to proactively manage potential risks.
Although cost savings typically remains the most important driver to make the switch to self-funding, every employer’s specific priorities are different. Some employers have said their decision to self-fund was the best fiscal option for the business while still providing the same level of coverage for their employees. Others said it was the only affordable way to continue offering the level of benefits that allowed them to recruit talent when competing against larger companies in their industry. And others saw that self-funding presented the best potential for savings through plan design, when combined with assertive wellness programs and on-site care.
Regardless of how the market may change, we have seen the steady trend of mid-size and smaller employers showing interest in transitioning to self-funding. Our market research shows that there is potential for 35,000 small and mid-size employers to switch to self-funding by 2020. Whatever the level of interest in self-funding and the particular motivation, the right approach and the right tools will help employers decide if self-funding is right for their business.
Karin James is AVP, Stop-Loss Strategic Operations for Sun Life Financial. She will lead a webinar for brokers on self-funding and stop-loss opportunities on Tuesday, April 4. You can register here.