Self-insured plans (or “self-funded” plans) are arrangements where an employer takes on the risk and offers group health benefits to employees using its own funds.
This is in contrast to a fully-insured plan, where the employer pays premiums for an insurance company that assumes the risk and provides benefits to participants. Employers are responsible for the payment of benefits claims under a self-funded plan. A plan document that includes similar provisions to those in group health insurance policies will outline the eligibility and schedule for benefits.
It is rare to find total self-insurance. Most self-funded employers buy stop loss insurance to reduce risk and protect against financial losses. These policies usually provide risk retention on both an individual and aggregate basis.
Although Aggregate and specific stop loss protection limit employer liability, there are still risks that cannot be transferred to the insurer. Employers must agree to give up the full security and associated cost of fully insured plans in order to avoid the possibility that the actual cost could be higher than what fully insured plans would have cost.
In 1974, the Employee Retirement Income Safety Act (” ERISA“) was passed. Employers were subject to many state laws which required them to become licensed insurers to fund their employee benefits plans. Those barriers were removed by ERISA, and employers with larger budgets began to self-fund their health plans.
Self-Insurance for Medium Sized Companies
Despite myths to the contrary, even small employers (often with fewer than 100 employees) can now self-fund their healthcare plans. Employers in the lower middle market (between 100-500 employees) have enough scale to significantly reduce operating costs and retain greater control over benefit plan design.
Self-insurance has the following advantages:
- Elimination of premium taxes Self-funded claim funds are exempt from premium taxes in most states. This means that there is an immediate reduction of approximately 2% to 33% of the total plan cost.
- Operational costs are lower. Employers often find that the administrative costs of a professionally managed TPA program, which is self-funded, are less than those charged by their previous insurer.
- The carrier risk charge has been eliminated. Insurance carriers are no longer required to pay risk charges. This usually leads to savings of 2% to 4%.
- Cash flow benefit. Cash flow benefits are a benefit to the employer that allows the employer to use money previously held by the insurer in the form reserves (e.g. for unreported claims or pending claims).
- Reserves return on investment. The employer retains full control over the interest on the reserves.
- Control of plan design. Self-funded employers have greater control over the plan design.
- Avoid mandatory benefits Avoid costly benefits mandated by state laws. Self-funded programs are exempted from state regulations. Employers can enjoy the same benefits in all states where their employees live.
- Administration that is tailored to the needs of the employer. The employer often has the option of third-party administrators who are interested in offering flexible services to the employer that can be purchased as needed.
Many large and medium-sized employers are still fully covered despite all of these benefits. They may believe they can get self-insurance, and so they might stay fully insured.
- Taking on too much risk.
- Due to its complexity, the plan setup will require significant internal time and resources.
- It is not possible due to poor or selfish advice from their broker.
There are legitimate reasons to be fully insured. However, many small and mid-sized businesses that avoid self-insurance are not fully exploring their options. For self-insurance, you need expert advice from actuaries to set up the plan, analyze the risk, and use sound risk management techniques.
