Employers who want to give their employees health care perks can choose between a fully insured health plan and a self-funded health plan. Even though the two approaches have a lot in common, they are also very different. Each has its own pros and cons. A fully-insured group health plan is one where the company buys the plan from an insurance company. The employer and employees pay the premiums and in exchange the insurance company takes on the risks of covering specific healthcare services. On the other hand, a self-funded plan also known as a self-insured plan is one where the health benefits are paid for by the business, not by an insurance company. In general, both fully covered and self-insured plans are governed by federal law. However, self-insured plans are not subject to state insurance regulations.
How Self-Funded Health Plans Work
Most companies hire a health benefits consultant or third-party administrator (TPA) to help them design benefits that meet the health coverage needs of their employees while staying within their budget. Most of the time, the consultant helps the company set up a plan document that explains what costs are covered, what costs aren’t covered, who can join the plan, how provider networks work with the benefits, and other important terms.
Instead of paying premiums to traditional health insurance companies. The business pays claims for services covered by the self-funded plan using the company’s own money and contributions from enrollees. Most of the time, the health benefits consultant or TPA helps the company figure out how much money should be set aside to pay for health care. It also helps decide whether the business should pay for the whole plan or just a portion of it. A self-insured business will usually set up a special trust fund to put money (from the company and the employees) aside to pay claims.
TPAs help companies figure out how much stop-loss insurance they need based on how much risk they are willing to take and, if available, their claim history. This coverage reimburses or even pays the company ahead of time when claims exceed individual or group thresholds that have already been set. Individual claims are covered by specific coverage, while claims made by a group are covered by bulk coverage. Most of the time, the employer hires a TPA to run the self-funded plan’s benefits, keep track of plan eligibility and membership, and do other administrative tasks.
Self-Funded Health Plan Requirements
Plans for groups of people who pay for their own health care are controlled by federal laws. These laws include:
The Employee Retirement Income Security Act (ERISA)
Health Insurance Portability and Accountability Act (HIPAA)
Consolidated Omnibus Budget Reconciliation Act (COBRA)
Americans with Disabilities Act (ADA)
The Age Discrimination in Employment Act
The Civil Rights Act
As well as various budget reconciliation acts. Such as the Tax Equity and Fiscal Responsibility Act (TEFRA), the Deficit Reduction Act (DEFRA), and the Economic Recovery Tax Act (ERTA).
Self-Funded Health Plan Advantages
Self-funded health insurance gives businesses a lot of benefits, such as more freedom in designing plans, the ability to make benefits fit the needs of each employee, and possible cost savings.
Cost Savings
One of the best things about self-funded health plans is the chance to save some money. By taking on the financial risk or providing health insurance, you have more say over how the money is spent. This lets you discuss healthcare costs directly and cuts out the profit margin that insurance companies usually add.
With a self-funded plan, you only pay for claims when they happen. Instead of paying annual or monthly premiums for claims that may or may not be made, you only pay for claims when they happen. In short, you don’t have to pay for things you don’t use. Also, with fully-funded plans, a big chunk of the money you pay goes to the insurance company to run the plan. In a self-funded plan, you can pay a Third Party Administrator (TPA) much less to handle the plan’s administration.
Claims Transparency
With self-funded plans, you have direct access to information about claims. This level of openness lets you look at how people use healthcare, figure out what drives costs, and take steps like care navigation tools to save money. With access to detailed claims information, you can make smart choices and make sure that your health benefits program works as well as it can.
Benefit Options
With self-funded health insurance, you can make a benefits package that fits the needs of your business and your workers. This gives you the freedom to adjust coverage choices, wellness programs, and other benefits to fit your company’s culture and the health needs of your employees.
Data Access
When you pay for your own health insurance, you have direct access to plan data, such as claims information, demographics, and trends of use. This information gives you the power to make choices based on facts, find places to improve, and use targeted interventions to improve the health and well-being of your employees as a whole.
Flexibility
Fully-funded plans give you less freedom than self-funded plans. With self-funded plans, you have the freedom to change your benefits package, choose specific coverage choices, and make programs fit the needs of your employees. You will also be able to change your health plan whenever you need to. For instance, you can add or remove participants at any time, as well as move people to or away from particular providers. This gives you the freedom to create a rewards program that works for your employees and helps their health and well-being as a whole.
Self-Funded Health Plans Disadvantages
Self-funded plans can be appealing, but it’s important to remember that they come with risks and may not be the best choice for every business.
Cost Uncertainty
Self-funded plans don’t have set costs like fully-funded plans do, which have yearly or monthly premiums that can’t be changed. Costs will depend on how many claims your employees make and how much care they need. This makes it hard to plan and budget for healthcare from year to year because you never know what will happen. In the planning phase of a self-funded plan, budgeting becomes very important. This will rely on things like the age, location, and number of dependents of the employees. The most important factor is estimating how many claims you might get.
When thinking about self-funded health insurance, it’s important to look at your employees’ numbers and health risks. Self-funding may cost more if your workers have higher health risks or have had expensive medical treatments in the past. Doing a full analysis of the health of your employees can help you decide if self-funding is a good idea.
Overage Risks
You have to pay for all eligible claims, no matter how much they cost. Unexpected claims with high costs can affect your cash flow and put a strain on your funds. As was said above, there can be a lot of uncertainty with these types of plans, so it’s important to have enough reserves and risk-mitigation methods like stop-loss insurance in place to deal with possible financial risks.
Administration
Self-funded health insurance plans require more secretarial work than fully-funded plans. You will be in charge of claims handling, managing provider contracts, making sure that rules are followed, and making sure that reports are correct. This routine work can be hard, especially for small businesses that don’t have a lot of staff or money. It’s important to think about how well you can handle these duties. One way for businesses to save time and money is to hire a Third Party Administrator, or TPA, to handle these kinds of administrative chores.
How To Manage Self-Funded Health Plan Risks
Self-funding health insurance can be dangerous for some businesses. However, there are a number of ways to deal with the risks that come with self-funded plans.
Stop-Loss Insurance
Stop-loss insurance is a very important tool for self-funded health insurance to use to control risks. It protects you from huge claims by giving you money back for claims that are more than a certain amount. Stop-loss insurance lets you limit your financial risk and protect your business from claims that cost a lot of money.
Mitigate Risks
Risk mitigation techniques can help keep costs down and deal with possible risks. Some of these strategies are healthcare navigation services to help people find high-value care, utilization review programs to track how much health care is used and find ways to save money, and disease management programs to help workers with long-term conditions.
Regulation Compliance
The Employee Retirement Income Security Act (ERISA) has rules about health insurance plans that pay for themselves. It’s important to make sure that ERISA standards are met. Such as giving participants plan documents, summary plan descriptions, and yearly reports. Some parts of the Affordable Care Act (ACA) also apply to self-funded health insurance plans. For example, they must cover basic health benefits, provide free preventive care services, and meet annual reporting requirements. Self-funded health insurance plans must follow not only federal rules, but also state rules and reporting standards. To avoid fines or legal problems, it’s important to know the laws that apply to your state and make sure you follow them.
Group Health Plans With EZ
EZ can help you find a fully paid group health insurance plan if you don’t think self-funded is right for you. Call EZ to get free prices or to find out more about group health insurance plans. Our experts can help you save hundreds of dollars a year by finding the best plan for your business. You can reach one of our highly trained agents at 877-670-3531 or by entering your zip code in the bar above. We can help you with any questions you have and get you started right away.
With over a decade of helpful content experience Cassandra has dedicated her career to making sure people have access to relevant, easy to understand, and valuable information. After realizing a huge knowledge gap Cassandra spent years researching and working with health insurance companies to create accessible guides and articles to walk anyone through every aspect of the insurance process.
