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Self-funding, sometimes referred to as self-insurance, is a way for organizations to plan for low risk benefits like dental care. With Self-funding, organizations pay for actual treatment received by members, rather than a monthly premium. This pay-for-utilization method usually results in better dental coverage at lower organizational costs.
Dental insurance, is it necessary?
Most organizations recognize that a dental benefit is an important part of their overall benefits package — as a matter of fact 89% of large organizations offer some sort of dental benefit†. But, when it comes to choosing a plan, is dental insurance the right choice?
Insurance, by definition, protects against potentially catastrophic losses that are impossible to predict. Insurance against fires, earthquakes, car accidents, and medical events is a good idea because such occurrences are unpredictable and can be very expensive. Dental care is different; it is highly predictable, and usually involves claims of relatively small dollar amounts. Adding to the predictability of dental costs are annual maximum amounts which are often capped at anywhere from $500 to $2,000. Hence, dental insurance is designed to merely assist with routine expenses of dental care, rather than insure against great risk.
Why are dental benefits predictable?
The majority of dental plans set an annual maximum benefit anywhere from $500 - $2000, thus minimizing the plan's risk exposure. Moreover, patients tend not to overuse dental benefits. In fact, studies show that 40% of all employees with a dental benefit never actually visit the dentist in a plan year. Of the 60% who do utilize their dental benefit, only 5% will hit their annual maximum benefit amount‡. On average dental costs tend to be around $168/ per individual and $300 /per member+ dependents. These average costs represent a fraction of the cost of most dental insurance premiums.
What is an employer self-funded Plan?
A self-funded (self-insured) plan is one in which an organization directly funds the benefit rather than going through a third party. Under this type of plan, there are no monthly premiums to pay. Instead, the employer sets money aside for the benefit in a special fund until it is needed for the payment of claims. Under an employer self-funded plan, the traditional financial responsibility of the insurance company is taken on by the self-funding organization.
The Role of a Third Party Administrator (TPA)
Since most organizations do not have the internal resources or desire to take on the administrative tasks involved in self-funding, a third party administrator (TPA) usually manages the day-to-day tasks of the plan. The role of the TPA can be limited to claim adjudication and payment or can be more extensive and include reporting, obtaining access to provider networks, assisting with compliance issues and other such services. The TPA does not bare any of the financial responsibilities of the plan, they are simply a service provider for the self-funding organization.
Benefits of a Self-Funding Plan
Under a self-funded plan, organizations get greater plan design flexibility and are better equipped to offer the kind of quality plans that are important to their employees. That's because the employer, not the insurance company, decides on the plan parameters. Moreover, self-funding allows employers with multi-state office locations the ability to offer the same plan to all employees in every location. Aside from the quality and flexibility of self-funded benefits, one of the greatest incentives for an organization to self-fund is the cost savings.
Dental Insurance vs. Dental Self-Funding
When it comes to dental benefits, organizations have a choice between conventional insurance plans and self-funded plans. With a conventional insurance plan, organizations pay a monthly premium, the cost of which includes the insurance company's projected claim costs, overhead costs, profits, taxes, reserves, broker commissions, as well as various other charges. In exchange for this monthly premium, the insurance company assumes financial responsibility for claims filed on behalf of members based on the terms of the plan.
With a self-funded plan, there are no monthly premiums, instead, the employer sets money aside for the benefit and can invest or use the funds for general business purposes until they are needed for the funding of claims. In the end, any unused funds are retained by the employer, rather than held by the insurance agency as profit.
Since around 40% of people who have a dental benefit don't actually visit the dentist in a plan year, self-funding employers who are only paying for actual treatment costs rather than a monthly premium can realize substantial cost savings.
Unlike traditional insurance plans which follow a procedure-based model, most self-funded dental plans have a dollar-based coverage system. This means that the coverage amount is based on the actual cost of treatment, rather than the type of treatment. With a dollar-based plan, members need not be versed in the procedure classification system in order to figure out their member share, they only need to know the total cost of treatment.
Another reason that self-funded plans are more intuitive for members is that they tend to have fewer restrictions on treatment options. By contrast, insurance providers often impose heavy restrictions, exclusions, and waiting periods at the treatment level, leaving employees anxious about what will and will not be covered by their plan.
Cost Savings with a Self-Funded Dental Plan
Cost savings under a self-funded plan can vary based on the size of an organization, their dental plan choices, and the tenure of their dental plans (employers tend to experience greater cost savings after the first plan year). Below is one example of how a mid-sized company could benefit from switching from a conventional insurance plan to an employer self-funded plan through SureCircle.
ACME Corporation Example
ACME is a mid sized company located in San Jose, CA. Acme has 173 employees, 107 of which have at least one dependent. Through a leading dental insurance provider, ACME's yearly premiums come to $196,006. With an employer self-funded plan from SureCircle, their estimated yearly costs would only be $141,803 — saving them an estimated $54,203 or 28%.
† National Association of Dental Plans (NADP).
‡ American Dental Association website |
