When you're considering types of health insurance to offer your employees, it’s important to understand the difference between the two main types of plans, self-funded and fully-insured.
The advantages of self-funded health plans can greatly outweigh those of the more traditional fully-insured types. In this guide, we will examine the differences between both, the pros and cons, and how to successfully move from a fully-insured to a self-funded plan.
What are Self-Funded and Fully-Insured Health Plans?
A fully-insured health plan is one that most people think of when they consider health insurance. It consists of a monthly premium paid to a health insurance carrier, which provides a specific plan that outlines certain deductibles and copayments that must be made before they begin to cover the remaining costs of a doctor or hospital visit.
The insurance carrier holds all the risk and has to pay the claims, regardless of whether they are higher or lower than the premium paid. This model most resembles the typical car or rental insurance structure that people are familiar with.
A self-funded health plan also requires that subscribers pay monthly premiums, but the difference is that the risk of the plan cost not covering the actual claim expenditure is not transferred to the carrier. Instead, that risk is absorbed by the company funding the plan and its employees who subscribe to it. Said differently, the employer funds its own health plan.
How Do Self-Funded Health Plans Work?
A self-funded plan is created between several parties: the employer, a third-party claims administrator (TPA), and an insurance carrier that provides reinsurance for the employer. The company enters into a contract with these parties according to the plans they wish to offer, the level of coverage that they need, the risks they will assume, and the monthly plan funding needed.
The claims administrator also provides the company with a network, or list of doctors and hospitals that accept the policy. They also process claims for the company. However, the claims administrator does not assume any risk for the policy; their role is merely administrative.
Key Differences Between Self-Funded and Fully-Insured Plans
The main differences between self-funded and fully-insured plans are outlined below.
Self-funded plans have the following characteristics:
Risk is assumed by the employer and its employees
The claims administrator provides access to health care providers in its network
The role of the claims administrator is primarily administrative
Cost to employees and the employer is often cheaper than a fully-insured plan
Claims are paid by the company and employees through company assets
The company may add on reinsurance, or stop-loss, to protect against catastrophic high claims.
Any excess premiums not paid out in claims are kept by the company
Claims administrators’ earnings are restricted to administrative tasks
Additional compliance requirements for the employer
In contrast, fully-insured plans typically have these characteristics:
Carrier assumes the risk of all claims
If premiums exceed claims paid out, the carrier retains them as earnings
Carriers set rates based on the number of subscribers and expected claims
Rates typically increase every year
Insurance carrier provides access to health care providers in its network
The role of the insurance carrier is active
The carrier must meet multiple compliance requirements, leading to higher costs
While both types of plans provide access to a network of healthcare providers and a detailed list of costs that employees can expect to pay towards deductibles and copayments, a self-funded plan is typically cheaper than a fully-insured one.
Understanding the Pros and Cons
To further understand if this option is right for your organization, it's important to look at the pros and cons of self-funded health plans.
Advantages of Self-Funded Health Plans
Self-funded plans offer several advantages, including:
1. Often Less Expensive than Traditional Fully-Insured Plans
Traditional fully-insured plans must make sure that they always have enough money on hand to pay all claims, and must also meet a variety of compliance regulations. For example, a fully-insured plan must charge taxes on gross premiums and assume administrative and underwriting costs.
Self-funded employee health benefit plans do not have these costs, leading to a cheaper overall plan.
2. Any Excess Premiums Paid Become a Part of Company Assets
A fully-insured plan administered by an insurance carrier charges monthly premiums based on a variety of factors. Any excess premiums are retained as income to the carrier.
In contrast, a self-funded plan that collects excess premiums during the year can use those to reduce premiums in the following year or increase the level of coverage it is able to offer to its subscribers.
3. Can be Fully Customized to Meet Subscriber Needs
While typical fully-insured plans are generally one-size-fits-all, a self-funded plan can be tailored to meet the needs of its subscribers. For example, if most employees are young and have few health problems, it may make sense to offer a reduced level of coverage.
In contrast, a group of employees with mixed demographics will likely need more customization. The plan may be adjusted each year based on any changes to the demographics and needs of a company’s employees.
4. Ability to Reduce Company Risk Through Stop-Loss Provisions
The company can add a stop-loss provision contract to its self-funded plan to ensure any catastrophic high claims that occur are covered and don’t drain a company of its funding reserves.
Disadvantages of Self-Funded Plans
Self-funded plans have some downsides, including:
1. Not Suitable for Companies of Every Size
Historically, self-funded plans have been offered by large employers with many employees, because a large number of employees leads to an increased ability to predict expected claims. However, in recent years there have been new self-funded products developed that allow a small company to offer its own self-funded plan.
2. Setting Up a Self-Funded Plan can be Complicated
Self-funded plans can be complex. However, many claims administrators will work directly with companies to ensure that they set theirs up properly.
Steps to Move from a Fully-Insured to a Self-Funded Plan
If you are interested in moving your company from a fully-insured to a self-funded plan, take the following steps:
1. Create an Action Plan
Lay out all the details you’ll need to consider before putting the changes into action. Such a plan can outline all steps that you need to take and the period when you anticipate having them completed. Your broker or consultant can help you identify these details.
2. Determine Risk Tolerance
This will help you identify the risk associated with catastrophic claim events that could quickly drain plan funding.
3. Coordinate with Related Parties to Set Up the Plan
Whether you choose to work with a third-party administrator or insurance carrier, you’ll want to utilize the right resources to ensure that you draft an appropriate plan that meets all compliance requirements (and works for your employees). You’ll also want to make sure you are working with a broker or consultant who understands self-funded plans.
4. Designate an Administrator and Set Up Contracts
The claims administrator or TPA will ensure that network access is set up, monthly premiums are received, and monthly claims paid, along with other administrative duties.
How to Make the Most Out of Self-Funded Health Plans
The significant advantages of self-funded health plans have led more small businesses to move away from the more traditional, fully-insured model. To set up your self-funded plan for success, you don’t have to do it alone. With Bennie’s Better Health Plan, you can now offer better benefits while simplifying how you evaluate, administer, and run your program.
Enjoy all the benefits of self-funding while paying a lower monthly payment than fully insured. You get a suite of products that fit all of your employee benefit needs, and for the first time, you can choose your monthly payment for Medical, Dental, and Vision Insurance.
Better Health Plan has several advantages for both the employer and employees:
How Better Health Plans Benefit the Employer
Keep all your benefits the same
Access major national networks
Get claims data
Integrate with Bennie technology
How Better Health Plans Benefit the Employee
Employees can access their plan information
View ID cards
Check account balances
Healthcare concierge to answer their benefits-related questions
Preferred rates on additional benefits & products
Ready to get started and offer the top benefits for your employees while saving on time and resources? Contact us today to learn more about how Better Health Plans work.