Employers have options for selecting what type of health insurance they offer employees. At the highest level, they need to choose between a fully-insured vs. self-insured plan.
So, what exactly are these? Simply put:
- In a fully-insured plan, the employer purchases insurance from an insurance company. This is the traditional and most common insurance model.
- In a self-insured (also known as “self-funded”) plan, the employer acts as the insurer and provides health benefits directly to employees.
Let’s take a closer look at fully-insured and self-insured plans, their differences, and the pros and cons of each.
Fully-Insured Health Plans
The Basics
Who assumes the risk?
The employer pays monthly premiums to an insurance company. This means the insurance company takes on the financial risk and must cover medical claims.
How are premiums determined?
Premiums are determined on a per-employee basis and vary depending on:
- Employer size
- Employee demographics
- Healthcare use
Premiums may change over time due to changes in the employee demographics.
Who regulates fully-insured health plans?
All fully-insured plans must follow state regulations.
Pros
- The insurance company takes on the financial risk for future medical claims.
- Fully-insured plans are faster and easier to implement because the insurance carrier takes on the day-to-day operations.
- Premiums are fixed for a year, so employers can easily budget for the cost.
Cons
- Premiums are required and non-refundable, regardless of how many medical claims your employees have.
- The insurance company’s options limit employers’ plan design flexibility.
- States can mandate a specific health benefit for a fully-insured plan, meaning less room for savings.
Self-Insured Health Plans
The Basics
Who assumes the risk?
The employer takes on the risk by acting as the insurer.
How do they work?
A business with a self-funded plan can manage the health plan on its own, but most will hire a third-party administrator (TPA) to administer the benefits. Generally, only very large employers manage their own self-funded plans.
A TPA will help the employer set up their plan, obtain stop-loss insurance coverage, coordinate provider network contracts, and establish customized reporting.
While most self-insured plans are held by organizations with 200+ employees, there are affordable options for very small businesses—even those with 25 employees or fewer!
What is stop-loss insurance?
Stop-loss coverage reimburses the employer for medical claims above a set limit during a coverage period. There are two types of stop-loss insurance:
- Individual stop-loss: Covers medical claims that exceed the limit for individual plan participants
- Aggregate stop-loss: Covers medical claims that exceed the limit for the total plan costs
What does a self-funded plan look like?
Thanks to the flexibility of a self-funded plan, large employers often provide different plans to different workers. For example, management and labor employees may receive different benefits. Or they may be determined by occupation or hours of work.
Who regulates self-insured plans?
The Employee Retirement Income Security Act of 1974 (ERISA) sets mandates for self-funded insurance plans.
Pros
- Enjoy more savings potential, thanks to fewer benefit requirements, not paying a middle man (i.e., insurance company), and avoiding premium tax.
- Only pay medical claims as they arise, improving cash flow.
- Stop-loss coverage mitigates the financial risk for employers.
- Self-funding offers countless possibilities to customize the best benefits for your company and employees.
- This flexibility also allows you to manage the plan’s costs better.
- A state could mandate a health benefit for a fully-insured plan but exclude it for a self-funded plan, increasing your potential savings.
Cons
- Self-insured plans can take longer to implement because the employer needs to vet and engage multiple third-party vendors to manage areas like claims management and compliance.
- Since they are more hands-on and complex, self-funded plans are not ideal for employers with limited time or resources.
- There is a possibility for unpredictable and expensive medical claims.
- Self-funded plans come with compliance requirements, such as non-discrimination, 5500 tax filings, and HIPAA requirements.
Fully-Insured vs. Self-Insured: What’s Right for Your Business?
Is rapid company growth causing you to rethink your health insurance? Or are you a young business owner new to the world of health benefits? It’s crucial to know your options so you can find the plan that works best for your business and team.
If you need guidance choosing between a fully-insured vs. self-insured plan, contact us today at 603-818-4131 or info@bluelionllc.com. Our HR experts will discuss your insurance options and ensure you remain compliant no matter what you offer.
The information on this website, including its newsletters, is not, nor is it intended to be legal advice. You should contact an attorney or HR specialist for advice on your individual situation.
