Save On Employee Health Insurance Costs by Self Insuring

Affordable Health Insurance for Small Business

We are often led to believe that risk is bad and nothing good can come of it. It’s commonly associated with being a victim of identity theft, adverse consequences such as a loss of property, something catching on fire and explode or losing decades worth savings stashed in your invested investment portfolio overnight. This kind of thinking ultimately results in thousands of dollars a month to hundreds of thousands of dollars being wasted annually. These companies that I am referencing in this post are all relatively small businesses ranging from a few dozens to several hundred employees. As the group size increases, the excess costs could easily be magnified. There is a lot of dead money looming out there in someone else’s bank account that could be recaptured by businesses and invested in such a way that promotes the company.

Benefits are rarely being used except for annual wellness checkups and a run to the pharmacy to get antibiotics due to the latest epidemic going around town. On rare occasions, people will need to go to urgent care or the nearest emergency room for treatment. Companies that have dozens to hundreds of employees are more likely to experience a beloved coworker go through a catastrophic life event. Fortunately, it is not experienced with much frequency. Overall, health insurance premiums are paid out month after month with few people actively using the benefits.

Take the risk and reap the reward

I have encouraged my clients to move away from conventional health insurance to a more unconventional approach which makes more sense and saves companies a considerable amount of money. Health Insurance absorbs the risk of paying for costly catastrophic health events out of pocket, transferring the risk from the employee to the insurer. The insurer covers the medical bills and for the most part, you only pay a small monthly premium. But as we discussed before, catastrophic health events rarely happen and that’s the elephant in the room that goes unaddressed.  The insurance company gets the profits for taking the risk of a negative event taking place, plus they also received profit from unused benefits due to infrequent doctor visits. The company gets nothing.

An unconventional approach to health insurance instead encourages business owners to take a very calculated risk allowing the company to reap the benefits of any unused insurance coverage or benefits not used by the employees.  Health insurance benefits that go unused at the end of the year are refunded to the company, saving them tens of thousands of dollars annually.

Level funding lowers health insurance costs

This winning strategy is simply called level funded health insurance or self-funded health insurance and it works this way. Instead of paying an insurance company directly for coverage, a business owner decides to set up a “pool” of dollars to cover the estimated health expenses that employees may use within a calendar year. Let’s just say that it’s an even $50,000 to cover the health claims for company A. The owner would then set aside $4,166.67 monthly to cover the total health costs for that year. Only one of three things can happen to the pool of money. 1) You spend all the money in the pool. 2) you don’t spend all the money in the pool. 3) you spend all your funding and you don’t have enough money to cover all your employee’s health claims. Allow me to elaborate on why any of these three scenarios are winning situations for the company.

Scenario 1

This is a great place to be as the employer because you utilize 100% of what you allocated for health insurance as opposed to providing coverage that people underutilize.

Scenario 2

When you don’t use all your health insurance funding, you will get a percentage of the unspent insurance premiums back in the form of a rebate or refund. I have a client that I’ll tell you about more in detail in the next article I write. I’ll tell you all about a case study where a 15-employee company saved more than $50,000 a year switching to a self-funded health insurance policy.

Scenario 3

You might be wondering what you would do if your health insurance claims costs exceed the pool of dollars you set aside for your employees. The answer is simple. If you exceed the limit of your health insurance budget, a stop loss insurance policy kicks in and pays for all the health claims above $50,000. If you are wondering how much the stop-loss policy costs, it is typically embedded in the $50,000 reserve that you set aside. So, the worst-case scenario happens to also be a winning situation that business owners will take hands down 100% of the time instead of handing hard earned company revenue to insurance companies with nothing in return.

Small business health insurance can be affordable

Here at Next Generation Payroll, we are focused on educating our clients, so they can discover cost-effective solutions that work, making their business more efficient and profitable. Simply put, if you take the risk you get the reward and you save significant amounts of money in the process. Small business health insurance does not have to egregiously expensive to provide great coverage with a low deductible. If you have any question about how we may help you and your company, feel free to contact us at any time.

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