Orlando Harmon
Self-funded insurance, also known as self-insurance, is a type of insurance plan in which an employer takes on the cost of benefit claims. This means that the employer is financially responsible for paying employees' medical claims directly, rather than purchasing health coverage from an insurance carrier for a per-member premium. Self-funded insurance plans offer flexibility and cost savings, but also come with a large amount of risk. Accounting for self-insured liabilities can be complex, and companies should establish processes to estimate these liabilities and avoid negative impacts on their financial results. This involves evaluating the number of claims initiated during the reporting period that have not yet been paid.
| Characteristics | Values |
|---|---|
| Definition | Self-funded insurance, or self-insurance, is a type of plan in which an employer takes on the cost of benefit claims. The insurance company manages the payments, but the employer pays the claims. |
| Benefits | Self-funded insurance may be more flexible than traditional, fully-insured plans, as they are subject to less regulation. Self-funded plans can be customised to meet unique business needs. Self-funded insurance can also be a cost-effective alternative to fully-insured plans, as companies only pay for the healthcare costs of their employees. |
| Risks | Self-funded insurance plans have a large amount of risk, as employers are responsible for paying claims. Self-insurance liabilities can negatively impact a company's financial results if not properly managed. |
| Accounting | Accounting for self-funded insurance is complex and requires an understanding of the requirements and standards. Key accounting steps include recording premium equivalency charges, payroll deductions, handling claims and payments, and making year-end adjustments for unpaid claim liabilities. |
| Other Considerations | Self-funded plans may be able to lower administrative costs and eliminate profits for insurance companies. They can also create cash flow advantages and affect the regulations that apply to the health plan. |
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What You'll Learn
Understand the financial risk
Understanding the financial risk associated with self-funded insurance is crucial before adopting this model. Self-funded insurance, also known as self-insurance, is a plan where the employer takes on the financial risk and pays the cost of benefit claims as they arise. This is in contrast to fully insured plans, where the employer pays a premium to transfer the financial risk to a third-party insurance company.
The financial risk in self-funded insurance arises from the unpredictable nature of claims and the potential for high-cost or catastrophic events. For example, cancer treatments can exceed $200,000 in a year, and chronic illnesses can incur millions in ongoing costs. Small businesses, in particular, are vulnerable to such events, which could potentially put them out of business.
To mitigate this risk, employers often purchase "stop-loss" insurance, which provides financial protection if claims exceed a certain amount. There are two types of stop-loss insurance: individual and aggregate. Individual stop-loss covers each individual on the plan up to a certain amount, after which the insurance company pays. For example, if the stop-loss amount is $40,000, the employer pays the first $40,000 of an employee's health expenses, with the insurance company covering any excess. Aggregate stop-loss, on the other hand, covers the annual total cost of the insurance plan by setting an upper limit on insurance costs.
While self-funded insurance can offer cost savings and flexibility, it is important to carefully consider the potential financial risks. These risks can be mitigated through stop-loss insurance and a solid cash management strategy, but they still require careful management and should not be overlooked.
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Consult a health benefits broker
Consulting a health benefits broker is an important step in understanding and choosing a self-funded insurance plan. A broker can help you navigate the complexities of self-funding and determine if it is the right option for your business.
Brokers are well-trained in the field of self-funding and can guide you through the entire process, addressing any questions or concerns you may have. They can help you understand the risks and benefits, ensuring you are well-informed and confident in your decision.
One of the key advantages of self-funded plans is flexibility. Brokers can assist in designing a plan that meets your unique business needs, allowing you to customize your healthcare plan and control costs without compromising employee health. They can also help you establish a designated claims fund, such as an HRA (Health Reimbursement Arrangement), and advise on how much money to set aside based on various factors.
Additionally, brokers can provide ongoing support even after the plan is set up. They can offer services such as rate negotiation with healthcare providers, which is an opportunity unique to self-funded plans as employers are directly paying the claims.
When considering a self-funded plan, it is important to remember that it may not be the best option for every employer. Brokers can help you weigh the pros and cons, including the potential for cash flow advantages, lower administrative costs, and the ability to eliminate insurance company profits.
Consulting a health benefits broker will ensure you have the necessary expertise to make an informed decision about self-funded insurance.
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Estimate liabilities
Self-insurance liabilities are often overlooked by companies, only coming to attention when they negatively impact a company's financial results. Companies should establish processes to estimate these liabilities to avoid this issue.
The estimation process for self-insured liabilities is complex, so it is important to have an actuary who understands the requirements and standards. An actuary should be able to understand potential variations in benefit levels caused by legislative actions and economic indicators, such as inflation, and then consider the impact on projected claim costs and the recorded liability.
An actuarial report will provide a basis for understanding the liabilities, but communication with the actuary is also important, as it is often the more efficient route when dealing with external auditors. When documentation or communication is lacking, the external auditor may require more time and resources from the company or may charge higher fees to complete the required audit work.
Under US GAAP and GASB, management should record its best estimate of claim liabilities without a margin for the risk of adverse deviation. In practice, management generally records a specialist’s actuarial central estimate or an amount within a reasonable range of that estimate. While US GAAP provides little guidance, a risk-free rate of comparable duration is generally considered appropriate. GASB is more explicit, indicating that the company’s investment yield and the settlement rate of the liabilities should be considered.
Changes to a company’s self-insurance program, including varying deductibles, insurers, and types of insurance policies purchased, can complicate the ability to estimate total unpaid claim liabilities. A change control function can help to understand what is driving fluctuations in the estimate across financial reporting periods.
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Record-keeping
Initial Setup:
Record essential information during the initial setup of the self-funded insurance plan. This includes the premium equivalency charge, expected costs, stop-loss insurance, and plan administration costs. These records provide a baseline for future comparisons and help businesses understand the overall costs associated with the self-funded insurance plan.
Payroll Deductions:
Maintain accurate records of payroll deductions from employees' paychecks. These deductions represent employees' contributions to the self-funded insurance plan. Post these contributions in a liability account to ensure proper accounting and compliance. This step is crucial for tracking the flow of funds and ensuring that employees' portions are correctly accounted for in the company's financial statements.
Claims and Payments:
Efficiently manage claims and payments by following a systematic process. When a claim is incurred, debit the contribution deposit accounts (e.g., "Self-Funded Health Benefit Deposits") and credit the "Claims Payable" account. This step records the liability for the claim. When paying out claims, debit the "Claims Payable" account and credit the cash or bank account used for the payment. This ensures that claims are accurately tracked and accounted for.
Trust Accounts:
For self-funded insurance plans, it is essential to maintain separate trust accounts for claim funds. Keeping these funds separate from other business accounts ensures transparency and proper allocation. Many companies utilise trust accounts to manage claim funds effectively, reducing the risk of commingling funds and providing clear records for auditing purposes.
Year-End Adjustments:
Conduct year-end adjustments to account for any outstanding items. Include unpaid claim liabilities and any incurred but not reported (IBNR) claims at the fiscal year-end. These adjustments ensure that the accounts accurately reflect the liabilities and expenses associated with the self-funded insurance plan. It provides a true representation of the financial position related to the insurance program.
Excess Premiums:
Properly manage excess premiums to maintain accurate records. Credit back any amounts above the required premiums, such as "summer payrolls" or prepaid retiree premiums, to the expenditure accounts. By following this step, companies can ensure that only actual expenditures are reported. This practice helps in maintaining compliant and transparent financial records related to self-funded insurance.
Self-Insurance Liabilities:
Regularly estimate and record self-insurance liabilities at the end of each reporting period. This involves evaluating the number of claims initiated during the period but not yet paid. Properly accounting for these liabilities on the balance sheet is crucial, as they represent a financial obligation for the company. By actively managing these liabilities, businesses can avoid negative surprises and build a stronger financial foundation for their self-funded insurance program.
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Understand the regulatory environment
Understanding the regulatory environment is crucial when considering self-funded insurance. Self-funded insurance plans, also known as self-insured plans, are primarily regulated by federal laws in the United States. These plans are generally exempt from state insurance regulations. The federal laws that govern self-funded insurance include:
- The Employee Retirement Income Security Act (ERISA): This act ensures that self-funded plans have reporting requirements and protections against discrimination. It allows employers to customise health benefits without adhering to varied state laws.
- The Affordable Care Act (ACA): This act provides federal standards for self-funded insurance plans.
- The Health Insurance Portability and Accountability Act (HIPAA): This act ensures the protection of health information privacy and prohibits discrimination based on health status.
- The Consolidated Omnibus Budget Reconciliation Act (COBRA): This act allows employees to continue their health coverage after leaving their job.
In addition to federal regulations, there are state-specific considerations for stop-loss insurance, which many self-funded plans purchase to mitigate financial risk from high claims. States regulate stop-loss insurance differently, which affects how employers manage these policies. Non-federal governmental plans, such as those for state or local government employees, have their own set of regulations. The Centers for Medicare & Medicaid Services (CMS) oversee the enforcement of certain regulations for these plans and can impose penalties for non-compliance.
It is also important to note that self-insurance liabilities are often overlooked, and companies should establish robust processes to estimate these liabilities and build a strong control environment. Changes in the regulatory environment can impact the approach to developing unpaid claim estimates, so staying abreast of regulatory changes is essential.
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Frequently asked questions
A self-funded insurance plan, also known as a self-insured plan, is where an employer takes on the cost of benefit claims. Instead of paying fixed premiums to an insurance carrier, the employer sets aside funds to pay for actual medical claims.
Self-funded insurance plans are often more flexible and cost-effective than traditional, fully-insured plans. They are subject to less regulation and offer businesses the opportunity to customise their health care plan to meet their unique needs. Self-funded plans also allow companies to better manage healthcare costs and avoid paying insurance premiums, administrative costs, and profit margins.
There is a large amount of risk associated with self-funded insurance plans as employers are responsible for paying for claims. Self-funded plans are also more volatile than fully-funded plans, which charge a fixed premium.
To set up a self-funded insurance plan, employers can consult a broker to help design different insurance plan options for their employees. Employers will also need to establish a special trust that includes both corporate and employee contributions to pay incurred claims.
Accounting for self-funded insurance plans can be complex, so it is recommended to consult an actuary who understands the requirements and standards. During the initial setup, record the premium equivalency charge, expected costs, stop-loss insurance, and plan administration costs. Throughout the plan, subtract payroll deductions from employees’ paychecks and post the contributions in a liability account. Handle claims by making debit entries for claims payable and credit entries as claims are paid out from a trust account. At the end of each reporting period, companies need to estimate and record their self-insurance liabilities, which involves evaluating the number of claims initiated during the period but not yet paid.
