What’s the Difference Between Fully-Insured and Self-Insured Health Plans?

Barbara C. Neff

Rising costs are prompting some employers to re-evaluate how they provide health insurance coverage to employees—specifically, whether their fully-insured plans are the best choice for their circumstances. Fully-insured and self-insured health plans provide distinct approaches to funding your employees’ medical claims. Here’s what you need to know when weighing your options.

What is fully-insured coverage?

This is the traditional approach of purchasing group health coverage from an insurance company that will cover your employees’ claims. The insurer assumes the full risk of paying for the claims—according to the plan’s benefits and cost sharing provisions—in exchange for the premiums you pay.

What are the advantages of fully-insured coverage?

Fully-insured coverage has been around for some time because it offers several advantages. Predictability ranks at the top. Your premium cost is generally stable month to month, making it easier to budget and preempt unexpected health care expenses. Premiums are tax-deductible, too.

Employers with fully-funded insurance also don’t feel the effects of the rising health care costs as directly as those with self-insured plans. If the cost of claims in a coverage period exceeds expectations, that’s the insurer’s problem.

Fully-funded plans also allow you to avoid the administrative burdens and expenses associated with claims handling and legal compliance. These costs could include, for example, pricey software licenses and staffing, depending on the size of your company.

What are the disadvantages of fully-insured plans?

Group coverage usually has to be renegotiated annually. As costs climb, you could face soaring premiums, with few if any palatable ways to reduce your rate.

Fully-funded plans also lack flexibility when it comes to coverage. You might not be able to find or afford a plan that provides only the benefits and other provisions you desire.

What is self-insured coverage?

Also known as self-funded coverage, it essentially means the employer serves as the insurance company. You take on the risks associated with funding and managing the plan, including collecting premiums from enrollees and paying their claims as they’re submitted. Employers with these plans usually establish a trust fund or another reserve to hold the employer’s and employees’ contributions.

The employer assumes all financial risk, as well as administrative responsibilities. Frequently, though, self-insured plans contract with third-party administrators (TPAs) to handle the latter.

What is a third-party administrator?

A TPA processes the enrollees’ claims under a self-insured plan. TPAs can also provide other services that the employer would rather not tackle, such as enrollment and contracting with provider networks.

In addition, TPAs can ensure the plan complies with all of the applicable federal laws, including the following:

What are the advantages of self-insured coverage?

The biggest draw is that you don’t have to pay premiums to an insurance company—and subsidize their profits in the process. In turn, you may be able to offer your employees more affordable premiums.

Many employers also appreciate the ability to customize benefits, cost-sharing, and other provisions to meet their employees’ unique needs. Self-insured plans are less regulated than fully-insured plans (see below), so you’re not stuck with the standardized options insurance companies offer.

You also could end up with more money in your pocket because you:

  • Reap the savings from more efficient administration,
  • Earn interest income on the reserve fund, rather than an insurer, and
  • Don’t have to pay state taxes on their premiums, unlike traditional insurers, which pass the costs of their premium tax liability onto their customers.

Moreover, you’ll have greater access to claims data than you would with a traditional insurance plan. With a firmer grasp of your health care spending and its main drivers, you can tweak your plan and perhaps add targeted wellness programs to address problem areas. 

What are the disadvantages?

Again, you assume the full financial risk. If you experience high claim volume, catastrophic claims, or rapidly escalating health care costs, your cash flow may suffer. However, your stop-loss coverage can reduce the risks (see below).

You should know, too, that some of the savings opportunities can take years to pay off. Administrative costs, for example, don’t drop overnight.

Also, don’t underestimate how unpleasant it may be to deny your employees’ claims. It’s one thing when it’s a faceless insurance company saying no; it’s another when it’s your employer denying potentially life-saving care to you or a loved one.

What is stop-loss coverage?

Stop-loss coverage protects a self-insured plan from runaway liability for claims. It limits the amount an employer must pay for claims, kicking in to provide reimbursement when costs exceed a certain threshold for a coverage period.

The coverage generally is available in two forms. Specific stop-loss coverage applies to catastrophic coverage on a single enrollee. Aggregate stop-loss applies to excess costs for the entire insured group.

Are there regulatory differences between fully-insured and self-insured plans?

Generally, fully-insured plans are subject to greater regulation. That’s because self-insured plans aren’t subject to most state insurance regulations or the Affordable Care Act’s “essential health benefits” requirement. Instead, they’re regulated by the federal Employee Retirement Income Security Act (ERISA).

So, if a state regulation mandates that traditional health care plans provide certain benefits, a self-insured plan is exempt. You could save money by not offering that benefit. Bear in mind, though, that offering fewer benefits could hurt your recruitment and retention efforts.

Note: Both fully-insured and self-insured health care plans are subject to the federal No Surprises Act, which protects consumers from surprise “balance billing” when getting emergency care, non-emergency care from out-of-network providers at in-network facilities, or air ambulance services from out-of-network providers. Among other things, it establishes a process for determining the amount an insurer must pay a provider for a covered but out-of-network service. 

What is a level-funded plan?

So-called level-funded plans have gained popularity in recent years by offering a kind of hybrid plan, with some features of both fully-insured and self-insured plans. Technically, though, these are self-insured plans.

According to the Kaiser Family Foundation, under these arrangements, the employer makes a set—or level—monthly payment to an insurer or a TPA, similar to a premium. The insurer or TPA uses the money to fund a reserve account for claims, administrative costs, and stop-loss coverage premiums. If the claims are lower than projected, the surplus may be refunded at the end of the contract.

Because level-funded plans are self-insured plans, they’re not subject to state insurance regulations. If sold to an employer with fewer than 50 employees, they’re also not subject to the ACA’s rating and benefit standards for small businesses. That could cut costs but leave gaps in coverage.

Which type of plan should I choose?

It’s not always cut-and-dried. Self-insured plans often make sense for businesses with at least 25 employees—if they have a strong cash flow. Smaller companies might also fare well with a self-funded plan if they obtain stop-loss coverage.

On the other hand, you may prefer to focus on your company’s core competencies and take a hands-off approach to day-to-day insurance matters. Some employees and top hiring prospects might feel more comfortable with a traditional plan. In such circumstances, a conventional  fully-insured plan would be the correct route.

No matter which way you’re leaning, you’d be wise to do some extensive research before you pull the trigger.

Barbara C. Neff has been writing about a variety of legal and other topics since 2001. She has a law degree and a master's degree in journalism.
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