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Traditional Funding- You pre-pay a set premium each month for claims that may
or may not occur. The advantages for this type of payment arrangement are:
The disadvantages of this type of funding are:
- Level premiums each month.
- Month to month contract.
- No cancellation or run out cost when plan is terminated.
- Claims experience is pooled with similar companies.
- Benefits older and higher risk groups.
Preferred Funding- Administration and stop loss expenses are paid monthly. You
reimburse the insurance company for actual claims after they occur up to a
specified level. Built in safeguards protect you from risk. Terminal
reserves-budget for two months for plan costs to pay for expense after termination,
- You are paying for services you may or may not use.
- Benefits designs are limited.
- Good claims experience-insurance company keeps the money.
- Reserves --insurance company invests and earns return on your money.
The disadvantages are:
- You control the money.
- Increased cash flow for your business.
- Provides first year savings, as you are paying ten months of claims.
- Gives you the opportunity to save dollars when claims are low.
- You keep reserves.
- You do not have to comply with state mandates.
- You receive detailed claim reports.
- Flexibility with benefit designs.
- Shared risk.
- Annual contract.
- Run out cost after plan terminates. Not offered by all insurance companies.
Self-Funding- Employer selects the benefits and plan design. Claims and administration
is handled by a third party administrator (TPA) or through an insurance company.
Specific and stop-loss insurance coverage can be purchased. Claims are adjudicated by
the TPA and then payment is funded by the client.
An employer that experiences favorable claims experience, can normally benefit with a
self-funded program. On the other hand, poor claims experience will normally result in
higher cost than traditional funded programs.
- You can circumvent State mandated benefits.
- More flexibility with benefit design.
- Detailed claim reports showing exactly where your money is being spent.
- Improved cash flow when claims are low. 4 Reduced cost when claims are favorable.
- Companies with multiple facilities can offer the same benefit design for all locations.
- With a TPA, you must rent or access a managed care network. Negotiated physician and hospital fees may be higher than a Highmark Blue Cross or Aetna/US Healthcare or with a Great-West.
- Cash outlay is unpredictable in the first few years.
- Must budget for run out claims when terminated.
- Higher than expected claims will have a negative effect on cash flow.