Five years ago, a small but rapidly growing biotechnology company in Maryland, after years of renewing fully insured health plans for its employees, switched to a self-funded approach. This transition saved the company nearly $400,000 over five years. The reason was that the company's CFO, armed with data on employees' actual annual medical costs, could more accurately match costs with claims, fundamentally changing the original insurance coverage approach.

"In the first year, after setting aside required reserves, they saved 15% from their $2 million annual expenditure," Nunneker told CFO Dive on Monday. "After five years of operation, compared to expected fully insured costs, they have accumulated savings of nearly $500,000."

Nunneker is a principal and employee benefits practice leader at Early, Cassidy & Schilling, LLC, an independent boutique risk management firm in Rockville, Maryland. He said the company had one poor year in the past five—meaning claims were unusually high that year, causing actual expenses to exceed what they would have paid under a fully insured plan. But that year was a true outlier, which was expected.

"Because other years performed well, the company could still use the savings for employee compensation, hiring, and technology investments," he said. "Additionally, their plan offers high transparency and access to data, allowing them to better predict and strategize for poor years."

Breaking the Mold: The Applicability Boundaries of Self-Funding

Self-funding is not suitable for all companies, especially smaller ones. "If employee count is below 100, there is almost no negotiating leverage in the fully insured market, and you are forced to use a few insurance carriers," he said. "You can't really say to the insurer: 'I have enough claims data to prove your rate increase is unjustified.' However, over the past four years, the number of groups with fewer than 100 employees choosing self-funded medical plans has increased. More importantly, all businesses of that size should at least be familiar with how self-funding works."

For companies with 100 to 200 employees, after several years of accumulation, they may generate enough data to determine whether self-funding is viable, but it must be evaluated on a case-by-case basis.

Once employee count exceeds 200, companies have the ability to accumulate sufficient data to sit down with insurers and brokers to discuss adopting a different approach to employee health insurance. "At this point, you have some negotiating leverage to scrutinize underwriting standards and ensure the insurer provides stable rates," he said.

Despite the obvious appeal of self-funding, especially for larger companies, switching to this model remains the exception rather than the rule, largely due to inertia. Nunneker noted that executives are reluctant to initiate a process that occurs only once a year and would take time and energy away from other priorities.

"From an HR perspective, they usually just want to complete the renewal with minimal friction," he said. "I'm not dismissing HR entirely, but HR has many issues to handle—retention, hiring, compliance, etc.—and benefits renewal happens once a year, with uncertainty about which task becomes the top priority." Therefore, CFOs typically rubber-stamp the annual renewal, even though renewals often come with 8%-9% premium increases and pass costs on to employees.

"Ultimately, you end up in a situation where there is no one truly focused on and wanting to control this issue," he said. "However, this is usually one of the top three expense items for the company, and it often has the highest trend. But no one wants to touch it. In my view, that is truly puzzling."

To reduce the 8%-9% annual increase to an acceptable level, executives tend to negotiate higher deductibles per employee, for example, from $2,000 to $3,000, until reaching the maximum deductible allowed under the Affordable Care Act (typically $5,000 or $6,000, depending on plan type). This usually reduces the annual premium increase to about 5%, but executives often assume there is a reasonable reason behind the increase.

"Basically, people shrug and say: 'Okay, the increase will be between 8% and 10%,'" he said. "We won't try radical changes, so we just slightly raise the deductible to offset the increase. Then it drops to 5%, and everyone can accept that number. Then we give employees a 2%-3% raise, but at renewal, it's like taking back at least half of it through health insurance. That's why wages have been essentially flat over the past decade."

Design and Implementation of Self-Funded Plans

Companies can typically negotiate a self-funded plan with their existing fully insured carrier to transition smoothly and begin leveraging the "unbundled" third-party administrator (TPA) market. Most insurers can act as third-party administrators, handling plan administration, including the reserve or trust the company establishes to pay claims. For employees, the transition is almost seamless because they still receive documents from the same insurer. That was the case for the aforementioned biotechnology company.

"When they finally decided to act, they were able to self-fund with the same insurer, meaning employees could continue using the same doctor network," he said. "So, for employees, it was seamless."

Specific details vary by company, but generally, companies need to set aside reserves sufficient to cover one to two months of potential claims. To guard against catastrophic losses, companies can consider purchasing stop-loss insurance, where the insurer covers claims exceeding a preset level per employee.

"Suppose the stop-loss limit is $50,000," he said, "meaning when a claim reaches $50,000, your plan stops paying and the insurer starts paying."

Similar to fully insured plans, companies can adjust deductibles and other plan elements to control costs. If a high deductible is set (e.g., $5,000 or $6,000), companies can negotiate with the insurer or another insurer for supplemental policies, offering employees the option to purchase coverage to fill the deductible.

"Employees can choose to accept or decline the supplemental policy to fill the gap of the $5,000 deductible," he said. "For example, an employee pays $25 or $30 per month in premiums for a hospital indemnity plan, and if hospitalized, they receive the full $5,000 payout. Importantly, we provide basic medical coverage for employees' families, ensuring no one goes bankrupt in a catastrophic event."

There are other adjustable elements. If the company is larger, it can choose to self-administer the reserve account, earning interest and saving administrative fees. If smaller, most TPAs will require them to manage the reserve and include the cost in premiums.

"For groups with fewer than 250 employees, reserves are typically included in total costs," he said. "As you grow, you can decide whether to hold the reserves yourself and accumulate over time. But if done correctly, the cost of entering self-funding should be very low."

Companies can also implement health and wellness programs, reducing costs by encouraging employees to receive preventive care and monitor biometric indicators.

"If you successfully guide a potentially high-claim employee, then you save money for the company or shift costs, whereas under a fully insured model, those savings would only flow to the insurer," he said. "So, any strategic move you make now can truly impact the company's bottom line."

Nunneker expects more companies to seriously consider self-funding because of the need for alternatives amid rising costs. But this requires CFO involvement, as skyrocketing insurance costs are essentially a financial function.

"You just need to understand that there are products in the market offering protection similar to fully insured plans," he said. "They can provide you with meaningful data, enabling you to accomplish what employees and the company need."