Self Funded Insurance Plans (What's the Catch?)
Aug 8, 2024
At Yoko Co, we offer various types of health insurance to our team members¹. This means, each year, we hear about how much the cost will increase. Some years, it has been absurd - we had three years in which it was over 20%, each year! With no major claims.
A few years ago we were presented with the offer to switch to a self funded plan, which, when I first heard it, made me laugh out loud. An insurance plan so good, you pay for it yourself. Isn't this what I was doing for all those early years I couldn't afford to actually buy insurance?
Our broker persisted, and shared how it could save us some money - but every alarm bell in my head was ringing "What the big print giveth, the fine print taketh away." There is a zero, I mean ZERO, percent chance the insurance companies, of all industries, would just like to reduce their profits. There HAD to be a catch, I just couldn't see it.
Our broker shared what the upside looked like for us, and that there was no risk to us. But, he didn't articulate what the upside was for the insurance company, and without knowing that, this deal felt "too good to be true" and so, we didn't do it.
Every year, we do the same song and dance - he'd pitch it, explain the upside and how it was genuinely a good deal for us. Ever the skeptic, I wasn't buying it. At this point I've read dozens of articles about the topic, listened to podcasts, YouTube videos, etc. All of them focus on the advantages for the business, or the tactical steps of managing or, in some cases, administering the plan. Nothing I've seen explains why, or how, this is advantageous for the insurance companies.
So, if you're like me, and you want to know as well - I think I figured it out.
How Self-Funded Insurance Plans Benefit Insurance Companies
General health plans are priced based on the entire population's risk profile. A self-funded insurance plan is priced based on your company's risk profile. Our team has a relatively low level of risk, and therefore a relatively lower price.
By opting in to a self funded plan, we do the insurance company two favors.
We remove ourselves from the general population pool², which means the average risk, and average price, for the rest of the population goes up. So the insurance company can charge a higher rate to everyone in the general population pool, in alignment with the increase in risk.
We backstop the cost for the plan, since we are, by definition, "Self-Funding."
So basically the insurance company wins 3 ways:
They get to increase the costs for their remaining population.
They get to reduce their upfront risk for their lower risk populations (like ours) and if things go well, they get a % of our money as a bonus.
And, no matter what, they get paid to administer the plan.
The only way they possibly "lose" is if we go into the stop loss policy, and even then they don't really "lose." It just kicks it up into another actuarial bucket, where they've done a similar level of math, but across all the self funded plans, to make sure they've hedged their bets well there too.
What Does This Mean for the Future of Insurance?
Personally, it does seem like it kind of undermines the spirit of the origins of insurance - all of us chipping in a bit, to help the community as a whole. As more and more people opt for self funded plans, and therefore remove themselves from the general insurance plan population, they push the curve to the right. Leaving those who are older, or who have illnesses, issues, and injuries, to bear more and more of the costs.
Take that logic far enough, and aren't we back where we started? With everyone basically shouldering their risk on their own? In which case, what is the point of insurance companies at all? Don’t they basically become self-licking ice cream cones? Existing solely to negotiate the incredibly complex web of rules and claims they built in the first place?
If we get to the point where we're all paying our own way, can we finally be rid of all these administrators and middlemen and go back to paying our healthcare professionals directly like any other profession?
And, would that be better, or worse, than the way it is now?
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¹ I could rant and rave a lot about America's Healthcare system, but it's all been said.
² I have not been able to verify if we actually get removed from the population pool, or if the population is legally required to consist of the complete population, self-funded or not. If you happen to know, I'd love for you to enlighten me.
