Rising costs are prompting some employers to re-evaluate how they provide health benefits to employees, specifically, whether their fully-insured plans are the best choice for their circumstances. Fully-insured, self-insured, and level-funded 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 and also regulated, so you will get the same pricing at every broker, which also adds to its predictability.
Employers with fully-insured insurance also don’t feel the effects of the rising health care costs as directly as those with self-insured plans. If the price of claims in a coverage period exceeds expectations, that’s the insurer’s problem.
Fully-insured 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. That ease of administration is especially important for small businesses, which often don’t have dedicated HR teams. Dekel Vered, Head of Human Resources, Prismm said, “As a smaller company, we wanted something easy and budget-friendly”, and chose to get a plan through Gusto because of the “all-in-one” functionality.
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-insured plans also lack flexibility when it comes to coverage. You might not be able to find or afford a plan that provides the exact coverage that works for your group, especially if certain specialty services (fertility, mental health, physical therapy, etc.) are important to your group.
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:
Health Insurance Portability and Accountability Act
Consolidated Omnibus Reconciliation Act
Americans with Disabilities Act
Age Discrimination in Employment Act
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, it may lower your health insurance costs and allow you 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 also know that some 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 is generally 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 providing 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?
Level-funded plans blend the predictability of fully-insured coverage with the cost-saving potential of self-funding. Technically a type of self-insured plan, level-funded coverage gives small businesses more control, more transparency, and more opportunity to save.
Unlike traditional plans, your costs are based on your group’s health and how much your team uses healthcare services. To calculate where to set the premiums for your specific group, the carrier will look at the claims utilization from the prior year, or will look at general demographic information, and may ask questions about your group’s current health. Teams with lower utilization can access cost savings.
With level-funded plans, you make a consistent monthly payment that covers three things: claims funding, stop-loss insurance, and administrative costs. If your team’s claims come in lower than expected, you could get a refund at year’s end. And if they’re higher than expected, your stop-loss insurance helps cover the difference.
Because level-funded plans are considered self-insured, they’re exempt from many state insurance requirements and small-group ACA rules, which can mean more flexibility in plan design and pricing.
This hybrid model is gaining serious traction. According to the Kaiser Family Foundation, the share of covered workers in small businesses enrolled in level-funded plans jumped from just 6% in 2018 to 38% in 2023. For small businesses looking to save on health insurance premiums while also safeguarding against the risks of full self-funding, it’s no surprise that level funding is on the rise.
And the cost savings can be very real. Gusto’s customers saved an average of 20% on health insurance premiums when they moved from a fully-insured to a level-funded health plan.
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 can often benefit from the cost savings of a level-funded plan, which also comes with the added protection of 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. If you already use Gusto for payroll and need some expert advice, you always have the option of connecting with a licensed health insurance advisor from the Benefits tab in-app (it’s free).
