July 10, 2023
A growing number of U.S. employers are making the switch to self-insuring to reduce costs and improve service. Self-insuring or self-funding is not right for every organization. Here is what you should consider before making the switch.
Self-Insurance vs Fully Insured
According to the Self-Insurance Institute of America, Inc., “a self-insured group health plan (or a self-funded plan) is one in which the employer assumes the financial risk for providing health care benefits to its employees. In practical terms, self-insured employers pay for each out-of-pocket as they are incurred instead of paying a fixed premium to an insurance carrier, which is known as a fully insured plan.
At its core, the difference between the two funding types comes down to who assumes the risk for providing health care benefits to employees. Self-funding assigns risk to the employer, while fully insured plans assign risk to the insurance company. In exchange for taking on this risk, self-funded employers have more agency and flexibility with their plan design.
The self-funding structure also creates some differences in terms of how payments are made, and what laws and regulations take precedence. This infographic, courtesy of our friends at Zywave, breaks down the core differences between a fully insured and self-funded approach:
Is Self-Insurance Common?
According to federal statistics, self-funded plans cover 60% of the private-sector workforce—almost 90 million workers and dependents. According to the Kaiser Family Foundation, those numbers include over 20% of employees at small companies, and more than 80% of employees at large companies.
What Benefits Can I Self-Insure?
- Health care (indemnity, PPO, POS and HMO only if large enough group)
- Short-term disability (STD)
- Prescription drugs
- Vision care
What Benefits Should Not Be Self-Insured?
- Any life insurance benefits, including AD&D and travel accident
- Long-term disability (LTD), unless coverage is for a very large group
Advantages of Self-Insurance
The primary reasons employers cite for self-insuring are:
Reduced insurance overhead costs
Carriers assess a risk charge for insured policies (approximately 2% annually), but self-insurance removes this charge.
Reduced state premium taxes
Self-insured programs, unlike insured policies, are not subject to state premium taxes. The premium tax savings is about 2%-3% of the premium dollar value.
Avoidance of state-mandated benefits
Although both insured and self-insured plans are governed by federal law (predominantly ERISA), self-insured plans are exempt from state insurance laws.
By self-funding, employers gain additional freedom and ability to design their own customized health benefit packages.
Employers see improved cash flow
Employers pay claims as they become due. There is also a cash flow advantage in the year of adoption when “run-out” claims are being covered by the prior insurance policy. Employers pay for claims rather than premiums and earn interest income on any unclaimed reserves.
Choice of claim administrator
An insured policy can be administered only by the insurance carrier. A self-insured plan can be administered by the company, an insurance company or independent third-party administrator (TPA), which gives the employer greater choice and flexibility.
Disadvantages of Self-insurance
The primary disadvantage of self-insurance is the assumption of greater risk. A year that brings large unexpected medical claims requires that the company has the financial resources to meet its obligations. This unpredictability puts greater demands on budgeting and cash flow. Budgeting is more difficult because health care expenses will vary from year to year, whereas with a fully insured plan, employers know how much they will pay in premiums each year.
Self-insured plans also require strong administrative skills. Self-insured employers can either administer claims in-house or subcontract the administrative obligations to a TPA. TPAs can help employers set up their self-insured group health plans and coordinate stop-loss coverage, provider network contracts and utilization review services.
Making the Decision
When deciding if self-funding is right for your organization, make sure that you consider the following best practices to ensure that your self-funding strategy is appropriate and effective.
Evaluate stop-loss coverage
Most self-insured employers purchase stop-loss insurance on their self-insured health care benefit plans to reduce the risk of large individual claims or high claims for the entire plan. There are two primary types of stop-loss insurance: individual/specific and aggregate.
- Individual/specific stop-loss insurance: This type of stop-loss coverage shifts responsibility for a claim to the insurer once it exceeds a certain dollar amount. Specific stop-loss protects the employer against large, individual health care claims.
- Aggregate stop-loss insurance: The insurer assumes responsibility once the total amount of claims for all employees reaches a specific threshold. Aggregate stop-loss insurance protects the employer against high total claims for the health care plan.
Understand the volume and nature of your claims
Knowing facts such as whether your workforce is mostly young or old, whether most claims were due to chronic illnesses or one-time incidents and the total dollar amount of claims will help you budget for claims in the future. Self-funding is a long-term strategy in which good and bad years average out in the employer’s favor.
Cash flow analysis
Self-insured plans work best for companies that have a strong cash flow or reserves. Understand what your cash needs are so you have money available to make timely claim payments.
Decide whether it makes sense to administer the plan internally or through a TPA. If you decide that it is best for your organization to use a TPA, make sure you factor TPA fees into your decision to self-insure. Obtain several different TPA quotes. Your TPA should offer a strong plan for monitoring the plan.
Decide on such things as eligibility, benefit coverage, exclusions, cost-sharing, policy limits and retiree benefits. Weigh the self-insured plan advantages of flexibility and lower average cost versus the increased risk and administrative responsibilities.
If you do not know where to start, we would be happy to help.