When it comes to workers’ compensation, businesses have multiple paths to choose from, ranging from traditional insurance plans to self-funded options. In recent years, self-funding workers’ compensation has gained traction among companies seeking more flexibility and control over their workers’ compensation solutions.
In the US, the percentage of employees covered by self-funded plans rose from 44 percent in 1999 to 67 percent in 2020. This figure then saw a slight decrease, reaching 65 percent in 2023.
However, before diving into this approach, it’s crucial to understand what it entails and evaluate whether it’s the right fit for your business.
Here’s a guide to the core considerations of self-funding workers’ compensation.
What Exactly is Self-Funded Workers’ Compensation?
In 2022, the US saw around 5,486 fatal workplace or work-related injuries. The work injury cost, back in 2022, was around $1,040 per worker. Now, who pays these compensations to injured workers?
In the case of traditional workers’ compensation insurance, a company pays premiums to an insurance carrier. A self-funded plan, on the other hand, allows the business to pay for work-related injuries directly.
Essentially, when a workplace injury occurs, the employer manages the claims and covers medical costs and other expenses out of pocket. This model provides the opportunity for tailored claims management and cost savings over time, but it’s not without its challenges. Thus comes the need to learn more about self-funding workers’ compensation.
According to Prescient National, when deciding whether to become a self-insurer, a company should consider several key factors. These include its financial strength, experience with risk-bearing programs like large deductibles, and the potential for cost savings. Also, a strong commitment to effective risk management and HR practices is essential.
Weighing Financial Viability
A business’s financial strength is the first consideration when looking at self-funding workers’ compensation. Employers should evaluate whether they have the financial stability to cover workplace injuries without the immediate help of an insurance provider.
In traditional insurance premiums are spread out over time. However, self-funded models require businesses to have immediate funds available to pay for claims as they arise.
It’s also crucial to consider the volatility in injury claims. One catastrophic injury could result in substantial costs, which could affect cash flow if not managed properly. To mitigate such risks, many companies opt for stop-loss insurance, a policy that kicks in if claims exceed a set limit. This additional measure, while offering some financial protection, also brings extra costs to factor into the budget.
Assessing Claims Management Capabilities
Efficient claims management is another key factor in self-funding workers’ compensation. Unlike traditional workers’ compensation, self-funded employers take on the responsibility of managing claims, from reporting to handling ongoing medical care and claim disputes.
This can be complex and time-consuming. That’s because claims management demands a thorough understanding of state and federal regulations, timely claims processing, and effective communication with medical professionals and employees.
To manage claims effectively, many businesses establish an in-house team or work with a third-party administrator (TPA). A TPA can assist in streamlining claims processing and maintaining compliance, which can significantly reduce the risk of legal issues.
Note that hiring a TPA will cost you around $25.27 an hour. Hence, it’s essential to weigh the costs of hiring or outsourcing claims management professionals against the potential savings of self-funding.
Why Do You Need to Evaluate Your Company’s Injury Risk Profile?
A company’s injury risk profile should play a central role in deciding whether self-funding workers’ compensation is a sustainable approach.
Industries like manufacturing, construction, and transportation, where the frequency and severity of workplace injuries are higher, may find it more challenging to self-fund. This is because of the higher likelihood of costly claims. On the other hand, office-based or low-risk environments might benefit more from this model because they tend to see fewer work-related injuries.
Conducting a thorough risk assessment can reveal if self-funding is a viable option based on your company’s history of workplace injuries. Lower-risk companies may find that they can adequately manage their costs while still offering robust protection for their employees.
Is Self-Funding Right for Your Business?
Self-funding workers’ compensation can offer substantial control and potential savings for businesses with the resources to handle it. However, it requires a deep understanding of claims management, regulatory requirements, and financial stability.
Before making this decision, it’s important to evaluate all aspects, consider potential risks, and seek advice from professionals experienced in self-funded workers’ compensation programs. This path can be highly rewarding for companies well-equipped to handle its complexities.
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