Cash flow is extremely important for any business, but it’s not always maximized to the extent it could be. Whether this is a matter of maximizing cash flow in day-to-day operations, payroll, or capital improvements, this is especially true with health insurance.
If your company health insurance is fully insured with an insurance company like BUCA (Blue Cross, United, Cigna, Aetna) you have no cash flow. Premiums paid to an insurance company are essentially ”prepaying” expected claims and administration each month. Administration cannot exceed 20% of premium, while the other 80% of premium is used to pay claims.
For example, if your company is paying $2 million of premium to an insurance company then roughly $400,000 is for claims administration and the other $1.6 million is earmarked to pay claims. An insurance company uses a multitude of variables to determine expected claims, but what if their estimate is too high, or you have a good year and the expected claim level is not reached? In this example your company would have paid $133,333 ($1,600,000 / 12 months) each month for claims – that may or may not occur.
Wouldn’t it be better to maximize cash flow by funding claims only if and when they occur? Your company can accrue of $1.6 million in the event that claims level was reached, but could utilize those dollars throughout the year for other expenses if claims were lower than the accrual. This is exactly the way a partially self-funded plan works. An employer only funds claims as they occur rather than prepaying those claims to an insurance company and giving them the float. Even in the case of a level funded plan, an employer still pays the premium and hopes to get a refund months after the contract year ends.
Maximizing cash flow can occur in two ways – lowering the cost of administration and only funding claims when and if they occur – thereby allowing the employer to keep the float. There are a variety of protections through reinsurance that will protect the employer in the event of catastrophic claims, as well as maximum claims for the year. In addition, monthly maximums for claims can be included.
It’s time to challenge the status quo for health plans and explore options that will help your company maximize cash flow. You would be surprised at the benefits your company can achieve. If you’d like to learn more you can reach me at [email protected] or call me at 970 – 349 – 7707.
Stay well and be safe.
Frank Stichter is the President of Strategic Healthplan Consulting LLC and has been advising employers on their health plans for 40 years, with extensive knowledge and experience in partial self funded plans.