Advantage: Visibility into health plan performance
Companies that self-fund healthcare have greater visibility into utilization and paid claims. This enables the business to understand both the plan’s big picture and its details. With access to aggregate health plan data, employers can more easily manage costs, proactively engage in preventative measures, provide alternative care, deliver wellness programs and, as noted above, secure savings.
With a self-funded plan, visibility into the types and frequency of claims helps businesses with their long-term financial planning, instead of putting them at a disadvantage during annual negotiations with traditional insurance carriers.
Advantage: Flexible plan design
When businesses self-fund their employer-sponsored healthcare 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.
With a wide variety of healthcare options from numerous providers, savvy organizations leverage their self-funded health plan as a competitive hiring advantage by offering better features and coverage, which might include telemedicine, mental healthcare, physical wellness and maternity/paternity leave.
Self-funded businesses typically contract with a third-party administrator (TPA) to administer the plan, including making claim payments to providers. TPAs provide employers with greater flexibility and can help set up group health plans, coordinate stop loss insurance coverage, deliver provider network contracts, if desired, and offer customized reporting.
What other differences exist between self-funded healthcare and fully insured health insurance?
When employers provide health benefits to employees, there are other key differences between self-funded and fully insured health plans.
At a high level, the benefit payment model differs as follows:
Self-funded Healthcare — The employer provides health benefits directly to employees, incurs the risk and pays healthcare claims as they are incurred.
Fully insured health insurance — The employer purchases health coverage from an insurance company that carries the risk and pays healthcare claims to the claimant’s providers.
At a more nuanced level, these healthcare plans differ in several other ways:
Self-funded health plans — Self-funded businesses pay employee healthcare claims, plus administrative fees and stop loss coverage.
Fully insured healthcare — 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 healthcare 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.
Self-funded health plans — Self-funded plans are subject to federal 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; claims; and continuation of health coverage.
With few exceptions, self-funded companies are not required to comply with state insurance laws that apply to medical benefit plan administrators.
In addition to ERISA, there are additional laws that impact self-funded health plans. Federal compliance for self-funded plans is overseen by an in-house employee, a TPA or legal counsel that functions as the plan administrator and fiduciary.
Fully insured Healthcare — Fully-insured plans are subject to ERISA regulations, other federal acts, and must follow state law and mandates. 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