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.
According to 2024 Employer Benefits Survey from the Kaiser Family Foundation.
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 employees.
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.
Adding reference-based pricing solution can reduce annual costs by up to 30%.
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
Fully insured health plans
Payment:
Self-funded health plans
Fully insured health plans
Stop loss coverage:
Self-funded health plans
Fully insured health plans
Regulations
Self-funded health plans
Fully insured health plans
SELF-FUNDED HEALTH PLAN: EMPLOYER GUIDE
