With all of the focus that is put into man­ag­ing and con­trol­ling health care costs today, it amazes me how many orga­ni­za­tions still look past one of the most effec­tive and least dis­rup­tive cost-sav­ing strate­gies avail­able to employ­ers with 150 or more cov­ered employ­ees – self-fund­ing your den­tal plan. There is a rea­son why den­tal insur­ers are not quick to sug­gest mak­ing a switch to a self-fund­ed arrange­ment … it is called profit!

Why self-fund dental?

We know that the notion of self-fund­ing still makes some employ­ers ner­vous. Don’t be ner­vous; here are the fun­da­men­tal rea­sons why this requires lit­tle risk:

  1. When self-fund­ing den­tal, your expo­sure as an employ­er is lim­it­ed on any one plan mem­ber. Ben­e­fit max­i­mums are typ­i­cal­ly between $1,000 and $2,000 per year.
  2. Den­tal claims are what we refer to as high fre­quen­cy, low sever­i­ty (mean­ing many claims, low­er dol­lars per claim), which means that they are far less volatile and much more pre­dictable from year to year.
  3. You pay for only what you use, an admin­is­tra­tive fee paid to the third-par­ty admin­is­tra­tor (TPA) and the actu­al claims that are paid in any giv­en month. That’s it!

Where do you save when you self-fund your dental?

Trend: In our ongo­ing analy­sis over the years, den­tal claims do not trend at any­where near the rate that the actu­ar­ies from any giv­en insur­ance com­pa­ny project (keep in mind these are very bright peo­ple that are paid to make sure that insur­ance com­pa­nies are prof­itable). There­fore, insured rates are typ­i­cal­ly overstated.

Claims mar­gin: This is mon­ey that insur­ance com­pa­nies set aside for “claims fluc­tu­a­tion” (i.e., prof­it).  For exam­ple, ABC Insur­er (we’ll keep this anony­mous) does not use paid claims in your renew­al pro­jec­tion. They use incurred claims that are always some­where between three and six per­cent high­er than your actu­al paid claims. They then apply “trend,” a risk charge and reten­tion to the over­stat­ed fig­ures. This fac­tor alone will result in insured rates that are over­stat­ed by five to eight per­cent on insured plans with ABC Insur­er, when com­pared to self-fund­ed ABC Insur­er plans.

Risk charges: You do not pay them when you self-fund! This com­po­nent of an insured rate can be any­where from three to six per­cent of the premium.

Reserves: Mon­ey that an insur­er sets aside for incurred, but unpaid, claim lia­bil­i­ty. This is an area where insur­ance com­pa­nies prof­it. They over­state the reserves that they build into your pre­mi­ums and then they earn invest­ment income on the reserves. When you self-fund, you pay only for what you use.

Below is a recent case study

We received a bro­ker of record let­ter from a grow­ing com­pa­ny head­quar­tered in Mass­a­chu­setts. They were hov­er­ing at about 200 employ­ees enrolled in their ful­ly-insured den­tal plan. After ana­lyz­ing their his­tor­i­cal den­tal claims expe­ri­ence, we saw an oppor­tu­ni­ty. After pre­sent­ing the analy­sis and edu­cat­ing the employ­er on the lim­it­ed amount of risk involved in switch­ing to a self-fund­ed pro­gram, the client decid­ed to make the change.

After we had received 12 months of mature claims, we did a look back into the finan­cial impact of the change. Had the client accept­ed what was his­tor­i­cal­ly a well-received “no change” ful­ly-insured den­tal renew­al, they would have missed out on more than $90,000 added to their bot­tom line. Their employ­ee con­tri­bu­tions were com­pet­i­tive to begin with, so the employ­er held employ­ee con­tri­bu­tions flat and was able to reap the full finan­cial reward.

This is just one exam­ple. I would not sug­gest that this is the norm, but sav­ings of 10 per­cent are. If you are a mid-size employ­er with a ful­ly-insured den­tal plan, self-fund­ing den­tal is a cost-sav­ings oppor­tu­ni­ty you and your con­sul­tant should be mon­i­tor­ing at every renewal.

By Gary R. Goodhile
Orig­i­nal­ly pub­lished by www.ubabenefits.com