A self-funded or (self-insured) health plan is one in which the employer assumes some or all of the risk for providing health benefits to their employees.
Stop Loss or “Excess Risk” Insurance
Stop loss insurance is a product that provides protection against catastrophic or unpredictable losses. Under stop-loss coverage, the employer is responsible for paying all claims up to a pre-determined amount, and then the stop-loss policy takes over. The two principal types of stop-loss are “specific” and “aggregate” coverage.
Individual stop loss
This type of coverage insurers against a catastrophic claim for any one individual that exceeds a dollar limit chosen by the employer and agreed upon by the excess-risk carrier. It is an individual deductible that caps the losses at a predetermined dollar amount. The stop-loss carrier will reimburse the employer or the plan for covered losses that are paid in excess of the individual or specific stop loss deductible under the terms specified by the stop loss contract.
This insures the group against unforeseen catastrophic claims that would cost more than budgeted. It provides a financial cap for the group as a whole. Essentially the employer’s maximum claims expense for the group is capitated at a predetermined dollar limit or a certain percentage of estimated costs called the “annual aggregate deductible” or the “attachment point”. Aggregate losses are generally reimbursed at the end of the contract period.
Fully Insured health plan
A fully insured health plan is one where an employer chooses one or more standard employee health plans offered by an insurance company and pays a monthly premium to access this plan. In exchange for the fixed premium amount, the insurance company assumes the risk of providing health coverage, absorbing any expenses above the maximum anticipated claims expense. Insurance companies are required to provide state mandated benefits. Generally, these plans have little or no flexibility to change the existing benefits being offered.
To learn more about self-funding, checkout out our FAQS page
What are the advantages for an employer to Self-Fund their health plan?
Lower Cost of Administration
Employers find that administrative costs for a Self-Funded plan administered through a TPA are significantly lower than those included in the premium by an insurance carrier or HMO.
Improved Cash Flow
Employers also have full control of the “funds” set aside for their group, keeping any interest earned on their reserves. In addition to an employers monthly fixed costs, they only pay for the claims costs actually paid during that month. Any amount that is below the maximum anticipated claims expense for that month is directly retained by the employer, allowing them to best determine how to use the excess funds.
No pre-payment for coverages
Fully insured carriers require that the premium is due in advance of the coverage. This premium amount includes projected or anticipated claim costs, state taxes, administrative fees, insurance company overhead, profit, commissions, and reserves.
Control of Plan Design
Employers have the flexibility to customize the benefit plan to meet the needs of their employees and maximize cost savings opportunities. They can choose to offer HMO, POS, PPO, or high deductible plan options. Certain employers, such as agricultural employers, may choose to cover specific items at no cost to their employees, such as testing for pesticides. Employers also have the ability to make exceptions and amend the plan at any time as necessary. This would not be an option with traditional commercial plans.
Elimination of State-Mandated Benefits
Self-funded plans must comply with federal laws under ERISA and are exempt from state-mandated benefits.
Carrier Profit Margin and Risk Charge Eliminated
The profit margin and risk charge of an insurance carrier/HMO are eliminated for the bulk of the plan.
Consistent benefits for out-of-state employees
Employers with locations in multiple states are limited to the benefits provided by a fully insured carrier in each state. Often they are forced to choose more than one carrier in each state based on the rates offered. State-mandated benefits requirements may also vary, causing inconsistent coverage. Since self-funded plans are exempt from state-mandated benefits employers may offer consistent benefits in all locations.
Reduced state insurance premium taxes
Fully insured plans are subject to a state insurance premium tax, which generally costs 2-3% of the total premium paid by an employer. With a self-funded plan, only the stop-loss insurance is subject to the premium tax.
Utilization and fund distribution reports are provided on a monthly basis or as needed by a TPA to an employer, regardless of size. These reports are generally not available or difficult to obtain by small employer groups from fully insured carriers.
WANT TO KNOW MORE?
We remain committed to the satisfaction and success of our clients and brokers by helping you achieve the best possible health and financial outcomes.