Employers providing health care benefits to their employees can choose one of two options: a fully insured health plan or a self-funded health plan. Although there are many similarities between the two, there are striking differences as well—And each approach has its pros and cons.
With fully insured plans, the employer contracts with the insurer to assume financial responsibility for all claims and administrative costs, in exchange for a premium that is paid by the employer. For plans that are fully self-funded, the organization assumes responsibility for all financial risk. This risk can be mitigated through stop-loss insurance, which provides protection if claims exceed a certain threshold over a certain period of time, typically a year. Stop-loss protection comes come in two types—specific or aggregate, specific being for one plan member who exceeds those thresholds, and aggregate being protection when total claims exceed a certain threshold which is established by the plan sponsor.
If you’re wondering whether self-funding might be right for your organization, the International Foundation e-learning course Self-Funded Health Plan Basics lays out the pros and cons to consider.
Advantages of a Self-Funded Health Plan
Self-funding a health plan incorporates several potential advantages for employers, including the following:
- There is more flexibility in customizing the plan to the employer’s goals and the employee population.
- The employer has more control over selecting, monitoring and coordinating all plan vendors.
- The employer retains funds when health claims are lower than expected.
- Self-funding a health plan is often less costly because:
- There are no profit or risk margins to pay to an insurer.
- There are no state-levied premium taxes.
- The plan does not need to satisfy certain ACA mandates and is not subject to state insurance laws and mandates.
- It is easier to access data on health care usage to identify trends and opportunities for cost savings.
Disadvantages of a Self-Funded Health Plan
Self-funding a health plan also carries a number of disadvantages, including the following:
- The employer is exposed to risk of high losses due to extraordinary claims.
- Current year expenses will be unpredictable.
- There is a possibility of financial loss due to operational inefficiencies.
- The risk of regulatory penalties and lawsuits increases due to the potential for errors caused by ignorance or lack of understanding.
- There is a higher risk of in-house fraud or abuse.
- The employer is exposed to higher risk based on demographics of the employee population (e.g., an employee population that skews older could increase the risk of high health claims).
What Percentage of Health Care Plans Are Self-Funded?
The 2020 Employee Benefits Survey found that self-funded health plans are in place at 62% of corporations, 72% of public employers and 85% of multiemployer plans. Specifically:
|Health Care Plan Funding||Corporations||Public Employers||Multiemployer Plans|
|Self-funded with aggregate stop-loss coverage||7.9%||13.3%||13.3%|
|Self-funded with specific stop-loss coverage||18.7%||21.7%||20.8%|
|Self-funded with both aggregate and|
specific stop-loss coverage
The report also found that smaller plans are more likely to fully insure their health care benefits, while larger organizations are more likely to self-fund their benefits. This makes sense intuitively, as smaller plans may not be able to bear the brunt of high-cost claims such as cancer, or certain high-risk pregnancies.
Enroll today in an International Foundation e-learning course! Courses include:
- Self-Funded Health Plan Basics
- Self-Funded Health Plans: Cost-Containment Strategies
- Self-Funded Health Plans: Understanding Stop-Loss Insurance.
Or depending on your learning style, you may prefer the helpful reference book Self-Funding Health Benefit Plans.
Communications Manager at the International Foundation
The latest from Word on Benefits:
- Legal & Legislative Reporter: Court Allows a Life Insurance Conversion Dispute to Move Forward
- The Epidemic of Loneliness: How Organizations Can Help
- Magazine Extra: Employee Benefits Join the Genomic Revolution Toward Precision Medicine
- From Debt to Zen: Transforming Financial Stress to Financial Serenity
- Recognizing Warning Signs of Employee Fraud Through Prevention, Detection and Response