An overview of
Self-funded health plans
What is self-funded insurance?
As it relates to employee health benefits, self-funded insurance is a type of health plan in which an employer incurs the risk to fund healthcare claims directly for eligible employees. This is different than the fully insured model where the business pays an insurance company a monthly premium to purchase health coverage for eligible employees and the insurance company incurs the risk.
How do self-funded insurance plans work?
With self-insured or self-funded health plans, the employer pays claims as they are incurred versus paying pre-determined premiums to an insurance carrier. The employer-sponsored health plan is “self-funded” by the company, and employees may contribute toward the cost of the plan. These contributions are typically invested in accounts specifically earmarked for health claims.
Nearly all self-funded employee benefit plans are managed through a third-party administrator (TPA). TPA firms may be owned and operated by a large insurer or, alternatively, can be independent companies that assist employer-sponsored plans with overall plan operations, benefit coordination and claims processing.
Self-funded employers also purchase stop loss insurance to minimize financial risk and protect the company from large or catastrophic claims.
The majority of American workers are covered by a self-funded health plan.
Who uses self-funded insurance?
As businesses in all industries face the challenge of finding affordable health insurance year after year, many are discovering that self-funded insurance offers a smarter and more cost-effective alternative to buying traditional fully insured health insurance coverage. This has proven to be true for both private and public employers.
Self-funded insurance is popular across businesses of all shapes and sizes, but ideal candidates are medium-to-large-size companies with more than 100 employees looking for greater control over their health plan spending. This approach allows them to be more flexible in designing a benefits package that meets the unique needs of their employees.
Benefits of self-funded insurance plans
Lowers costs – Self-funded health plans offer several cost-containment opportunities that, oftentimes, make them less costly than fully insured plans for both employers and their employees.
Reduces taxes & fees – A major driver behind the savings is reducing administrative and tax expenses rolled into the premiums of fully insured health plans. All told, these taxes and fees can account for up to 20% of an employer’s cost.
Increases visibility into plan performance – Companies with self-insured health plans often have greater visibility into how the plan is utilized and how claims are paid. This allows the business to more easily manage costs, proactively engage in preventative measures, provide alternative care or deliver new wellness programs to benefit plan members and reduce costs.
Offers more flexibility – When businesses self-fund their health plan, HR can easily customize options that make the most sense for the workforce, instead of being locked into a traditional insurance carrier’s options. By offering better features and coverage, savvy organizations leverage their health plans as a competitive hiring advantage.
Potential drawbacks to self-funded insurance
Risk management – Self-funded employers are responsible for paying all medical claims, including catastrophic claims for serious illnesses or lifesaving medical procedures. To mitigate this risk, employers invest in stop-loss insurance which puts a predictable cap on the amount they would have to pay in the event of catastrophic or high-cost claims.
Increased administrative oversight – Managing a self-funded insurance plan requires a higher level of oversight including managing the financial account established to play claims, and monitoring the performance of service providers. Choosing the right TPA partner can reduce the amount of heavy lifting for businesses and improve the quality of the experience for all parties.
Compliance with federal regulations – While self-funded health plans are preempted from state-level laws and other insurance regulations, they must still comply with federal regulations like the Employee Retirement Income Security Act (ERISA), Health Insurance Portability & Privacy Act (HIPPA) and the Affordable Care Act (ACA). Ensuring compliance with these regulations is often a new function within the human resources team. Selecting the right TPA partner and/or broker/advisor will help ensure the right process is in place.
Reference-based pricing helps reduce health plan costs.
Reference-based pricing and self-funded insurance plans
Employers with a self-funded health plan can employ reference-based pricing (RBP) to significantly reduce the claims cost to the group health plan, while ensuring fair reimbursements are paid to healthcare providers.
RBP is a cost-containment strategy that uses an established benchmark, like Medicare, to determine what is paid under the terms of a group health plan for a member’s healthcare services. The group health plan will set forth a maximum amount it will pay for any timely submitted claims under the terms of the plan.
Self-insured businesses can add a reference-based pricing solution to their health plan and potentially reduce annual costs by up to 30%. RBP providers review and audit medical bills, reprice them based on Medicare or another benchmark like the actual cost reported by the hospital, and recommend that the plan pay a fair markup on those costs. As a result, employers and employees save money on their healthcare spending.
Think of reference-based pricing as a bottom-up approach, starting at the bottom with a reference metric and then adding a fair profit margin to determine provider payment. This is in contrast to the Preferred Provider Organization (PPO) system, which starts at the top with a price that originates on a facility’s chargemaster and then discounts it to reduce the inflated price.
The difference between fully insured and self-funded insurance plans
When employers provide health benefits to employees, there are other key differences between self-funded and fully insured health plans.
Self-funded health plans
- The employer provides health benefits directly to its participants, or to providers on the participant’s behalf, incurs the risk and pays healthcare claims as they are incurred.
Fully insured health plans
- The employer purchases health coverage from an insurance company that carries the risk and pays healthcare claims to the claimant’s providers.
Payment:
Self-funded health plans
- Self-funded businesses pay employee healthcare claims, plus administrative fees and stop loss coverage.
Fully insured health plans
- Fully insured businesses typically pay a monthly per-employee premium (PEPM) to their insurance carrier.
Stop loss coverage:
Self-funded health plans
- Stop loss insurance helps to limit an organization’s liability in the event of a catastrophic claim or a year with an unusually high number of claims. A stop loss policy is a prudent backstop for many employer-sponsored health plans, since unusually high medical expenses could compromise cash flow or severely deplete a company’s reserve fund. To select the right type of policy, know the options.
- Individual stop loss (ISL): Provides protection against large claims incurred by individuals by creating a payment threshold or “specific deductible”. If total claims for a claimant exceed that determined threshold amount, ISL reimburses the plan for claims paid above the deductible.
- Aggregate stop loss (ASL): This coverage caps your liability for claims that fall below the deductible and that are, therefore, not eligible for reimbursement under the ISL coverage. The total of these claims over the contract period are capped by an attachment point or threshold. Eligible claims above that threshold are reimbursed by the carrier up to a predetermined maximum.
Fully insured health plans
- Fully-insured plans do not need to purchase stop loss coverage because the risk associated with catastrophic claims are borne by the insurance carrier, not the group health plan.
Regulations
Self-funded health plans
- Self-funded plans are subject to federal laws and regulations – specifically, the Employee Retirement Income Security Act of 1974 (ERISA). ERISA was enacted in 1974 to protect workers from the loss of benefits provided through the workplace and preempts state insurance regulations. The Act sets requirements for disclosure, reporting and fiduciary standards and claims handling.
- With few exceptions, self-funded group health plans are not required to comply with state insurance laws or regulations that apply to fully-insured plans. This allows for uniform plan administration and reduced costs for employers who have members who receive medical care when they are away from home, or if the group health plan has members located in multiple states.
- Self-funded plans are also required to comply with other federal laws and regulations. Self-funded plans work with their benefits broker and other professionals to design a plan that adheres to these federal laws and regulations.
Fully insured health plans
- Fully-insured plans are subject to federal and state laws and regulations that govern insurance. Multi-state companies with fully insured health plans must comply with the regulations of each state in which they have plans.
Additional resources for businesses considering self-funding healthcare
Understanding Self-Insured Group Health Plans – Self-Insurance Institute of America
Stop-Loss Definition White Paper – Self-Insurance Institute of America
A Model Self-Funded Health Plan – Self-Insurance Institute of America
Self-funding Overview – Health Care Administrators Association
Give your self-funded health plan strategy a tune-up.
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