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Financing Employee Benefits



Escalating health care costs in recent years have made it increasingly difficult for employers to provide health insurance benefits to their employees at a reasonable cost.  As a result, employers have sought alternative ways and means to keep the costs of their benefit programs under control.Some have opted to drastically reduce benefits; others have chosen to change insurance carriers frequently, utilizing whichever insurance company happens to have competitive rates at that time. Both of these can have a negative effect on employees, and is certainly only a short term solution to cost control.


Further, it is especially frustrating for those employers whose claim utilization is ordinarily low compared to insurance premiums paid. This employer is usually heavily subsidizing an insurance risk pool whose loss ratio is much higher than his own.


We believe these are long term problems that require more than short term solutions.


What then can be done to stabilize your costs as an employer and maintain quality benefits for your employees?




The Feasibility of Self-Funding



We believe that traditional group insurance plans require employers to over insure their employee benefits.†† This enables the carrier to charge high premiums, establish a reserve to its own liking, benefit from the use of your reserve funds and profit further from the low claim utilization of your group.


As an alternative, why not share in the financing of the plan to the extent that it is feasible from an experience stand point?


Self-funding means sharing in the surplus, but it also means sharing in the risk.  You, as the buyer, however, have the privilege of sharing only in the risk that your own circumstances dictate.  Group health insurance risks can be easily categorized and defined as;



                     PREDICTABLE LOSSES

Those losses that occur frequently, but are relatively insignificant in size and are predictable based on the groupís makeup of age, sex and plan of benefits.


                     UNPREDICTABLE LOSSES

Those classes occur infrequently, but are catastrophic in terms of size.


The most efficient purchase of insurance is to insure for unpredictable losses not predictable losses. No matter how high the cost of medical care, statistics indicate that adverse claims experience normally is a result of extensive claims by a limited number of individuals.Consequently, it is wise to purchase insurance to protect against this risk.  The amount of insurance necessary is dependent upon the size of the group.A smaller group requires more protection than a large group.


By purchasing insurance only for unpredictable or catastrophic claims, you greatly reduce high premium costs and thereby create cash savings to fund for predictable claims.


In addition, you will benefit from:


                     REDUCED FIXED COSTS

A Third Party Administrator will administer your plan with less overhead expense than an insurance carrier.


                     LOW CLAIMS UTILIZATION

Most group insurance plans have no provision for refunding overpayment of premium, effective coordination or subrogation of benefits.


                     REDUCED PREMIUM TAX

Premium tax is normally computed as a percentage of premium.


                     INTEREST OR RESERVES

Your company retains the claim reserves traditionally held by insurance companies.



A method of funding benefits to pay for anticipated losses, with provisions for stop-loss coverage.








Stop-loss coverage comes in two forms:  Specific and Aggregate.



This provides a maximum dollar amount of all covered claims that a benefit plan would pay on any one individual during a plan year.The stop-loss carrier reimburses the plan for claims paid in excess of the specific stop-loss.



This is protection coverage to limit the total liability on all participants on a small plan year basis, thereby allowing the plan to budget for a maximum annual liability.


                     THIRD PARTY ADMINISTRATOR

A third Party Administrator is a licensed administrator providing all of the administrative services previously rendered by your insurance carrier.





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