The rising cost of health care continues to be a major concern for all employers. Now is the time to assess your clients' plans to make sure they are utilizing the most efficient funding methodology for their benefit program.

The spectrum of insurance runs from a traditional fully insured plan, where the insured would have no risk, to a fully self-funded plan. The following continuum illustrates the level of risk associated with the different types of funding methodologies. It is important to note that there can be variations on each of these options.

Listed below is a brief summary of the various funding options available to your clients.

This is a traditional rating methodology used for "buying" insurance. Under prospective rating, a plan's experience is used to determine future premiums. Experience rated plans use the claim costs from a single employer or specific group of employers. Community rated plans are generally sold to small groups and individuals, pooling all experience together. Insurance companies are often very conservative with claim projections and often overestimate to be on the safe side.

Retrospective rating is an insured premium mechanism for financing health insurance whereby the group "eventually" pays for the cost of claims. When premium deferral is incorporated, premiums are set prior to the year with a portion (80%) going to the insurance company. At the end of the year, any surplus after the payment of claims and administrative costs (retention) is returned. In the case of excess losses, the group must reimburse the insurer through higher premiums in subsequent years or by other methods of settlement. The plan is able to invest a portion of the premium that is not immediately paid to the insurance company.

Cost plus or minimum premium mimics self-insurance to the extent that the plan takes on full responsibility for the claim costs. This funding mechanism is considered fully insured by the State requiring that all state insurance laws and mandates be followed. Many administrative duties, such as billing and collecting any employee/retiree contributions, become the responsibility of the group. Claim costs generally dictate premium swings. Cash flow is directly dependent on the claim experience. The plan must be prepared to pay for large dollar claims at the time they are incurred. Reserves need to be established for run-out as well as catastrophic claims. Reserves may be held by either the group or the insurer, and income from investment or interest can be used to offset premium costs.

The final option in the spectrum is a self-funded health benefits plan. The group would simply employ a third party administrator (TPA) to pay claims according to their established set of benefits. Provider networks, stop-loss insurance, managed care and other services are purchased separately at the group's discretion. The group must invest significant time to administer the self-funded plan, as it is basically the same as running an insurance company.

The chart below provides a comparison of the key features of each funding mechanism described above. It can assist you with quickly determining whether an alternate funding option is right for your client. KBM is prepared to assist you with this evaluation process. Call us today to set up an appointment to review your clients' existing benefit program and discuss plan alternatives.