Partially Self-Funded Arrangements

There is more than one way to pay for a benefits program — for example, partially self-funded programs allow employers to share in the risk of their collective group’s claims experience, both positively or negatively. Insurance companies are far more flexible in tailoring a benefit plan when a company decides to implement an alternative funding method, such as self-funded program. The goal is to improve the company’s cash flow by reducing the fixed cost of the insurance due each month and possibly reduce the cost of your benefits plan by sharing in the savings of good claim experience.

Employers pay fixed costs which include the administration fees associated with the program along with costs of insuring each member’s claim risk individually and as a group. (This typically equates to about 15%-20% of a Fully Insured Premium). Claims are paid as they are incurred monthly. Monthly claims costs are limited to a pre-determined amount; however, negative claims experience can increase claims liability. For example, assume maximum claims costs are $20,000 per month. Actual claims in the first month total $10,000 of claims; $10,000 is paid for that month. In the second month $30,000 of claims are incurred; $30,000 is paid for this month.

Employers count on positive claims experience that will result in a lower claims liability, thus providing a positive cash flow and lower cost of providing benefits. If a Partially Self-Funded Plan is cancelled, a payment known as a terminal liability fee will be required to cover the cost of run-out administration, excess insurance and claims.