As health care costs continue to climb, companies like you are actively looking for ways to reduce these costs. Some turn to cost-sharing methods, like offering high deductible health plans. Other U.S. employers are making the switch to self-funded health plans as a way to reduce costs and improve service.
Self-funded health insurance isn’t right for every organization. Employers considering a switch from a fully-insured health plan to a self-insured health plan should analyze the advantages and disadvantages before making the switch.
This article will give you a general overview of what self-insurance is, how it differs from fully-insured health plans and its market trends. It’s not intended as legal advice. You should consult a legal professional or plan administrator before making the change to a self-insured health plan.
What is a Self-Insured Health Plan?
A self-insured health plan is one in which the employer assumes the financial risk associated with providing health care benefits to its employees.
Rather than paying fixed premiums to an insurance company, which, in turn, assumes the financial risk of paying claims - the employer pays for medical claims out-of-pocket as they’re incurred.
A self-insured plan is a funding arrangement in which the employer assumes direct financial responsibility for the cost of enrollees’ medical claims.
How do Self-Insured Health Plans Differ From Fully-Insured Health Plans?
A fully-insured health plan is the traditional way to structure an employer-sponsored health plan. With a fully-insured health plan:
The company pays a premium to the insurance carrier
The premium rates are typically fixed for a year, based on the number of employees enrolled in the plan each month
The monthly premium normally changes during the year if the number of enrolled employees in the plan change
The insurance carrier collects the premiums and pays the health care claims based on the coverage benefits outlined in the policy purchased
The covered persons (that is, employees and dependents) are responsible to pay any deductible amounts or co-payments required for covered services under the policy
With a self-insured health plan, employers operate their own health plan as opposed to purchasing a fully-insured health plan from an insurance carrier.
One reason that employers choose to self-insure is that it allows them to save the profit margin that an insurance company adds to its premium for a fully-insured plan. However, a self-insuring health plan can expose the company to much larger risk in the event that more claims than expected must be paid.
With a self-insured health plan:
There are two main costs to consider: fixed costs and variable costs.
The fixed costs include administrative fees, any stop-loss premiums and any other set fees charged per employee. These costs are generally billed monthly by the third-party administrator (TPA), or carrier handling plan administration, and are charged based on plan enrollment.
The variable costs include payment of health care claims. These costs vary from month to month based on health care use by covered persons (that is, employees and dependents).
To limit risk, some employers use stop-loss or excess-loss insurance which reimburses the employer for claims that exceed a predetermined level. This coverage can be purchased to cover catastrophic claims on one covered person (specific coverage) or to cover claims that significantly exceed the expected level for the group of covered persons (aggregate coverage).
Self-Insured Health Plans & Stop-Loss Insurance
One component that many self-insured plans use is an extra feature called stop-loss insurance. The purpose of stop-loss insurance is to provide financial protection to a self-insured plan sponsor by capping and further defining the plan’s financial exposure.
A stop-loss contract operates differently from general insurance because it’s actually insuring the employer and not the individual employee. It’s important to grasp this concept. When a plan is self-insured, the stop-loss contract insures the employer against catastrophic losses under the plan. The medical plan established by the employer accepts the responsibility for paying providers’ claims for individuals but limits its risk with stop-loss coverage.
Stop-loss insurance is neither health insurance nor reinsurance. It’s more closely comparable to a catastrophic coverage plan that indemnifies a plan sponsor from abnormal claim frequency and severity.
Stop-loss claim reimbursements can be made for a variety of benefits, including medical, prescription drug, dental and others. Severe, high-dollar claims such as cancer, organ transplants and dialysis are considered “shock loss” claims, which can give plans the most concern when considering self-insuring.
The protection afforded by a comprehensive stop-loss coverage shows its value in helping to financially manage these catastrophic events.
Stop-loss insurance provides protection in two forms:
Specific stop-loss - Also referred to as individual stop-loss, it protects a plan against individual catastrophic claim occurrences. This type of stop-loss coverage shifts responsibility for a claim to the insurer once it exceeds a certain dollar amount for a specific claim. Example: An employer with a specific stop-loss attachment point of $25,000 would be responsible for the first $25,000 in claims for each individual plan participant each year. The stop-loss carrier would pay any claim exceeding $25,000 in a calendar year for a particular participant.
Aggregate stop-loss - Limits a self-insured plan’s financial exposure for the entire plan year (or policy year) and protects against abnormal claim frequency across the entire group of individuals. This type of stop-loss coverage protects the employer against high total-health-plan claims. Example: Aggregate stop-loss insurance with an attachment point of $500,000 would begin paying for claims after the plan’s overall claims exceeded $500,000. Any amounts paid by a specific stop-loss policy for the same plan would not count toward the aggregate attachment point.
Here’s the Top 6 Advantages of Self-Insurance:
The primary reason employers cite for self-insuring are:
Reduced insurance overhead costs - Carriers assess a risk charge for insured policies (approximately 2 percent 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 percent of the premium dollar value.
Avoidance of state-mandated benefits - Although both insured and self-insured plans are governed by the federal law (predominantly ERISA), self-insured plans are exempt from state insurance laws. State benefit mandates can add to the cost of insured employer benefit programs. For multi-state employers, self-funding can help create national consistency by elimination of the need for state-by-state compliance.
Employer control - Employers who want to revise covered benefits and the levels of coverage are free from state regulations that mandate coverage and the carrier negotiation typically required with changes in insured coverage. By self-funding, employers are able to design their own customized health benefits packages.
Employers see improved cash flow since they do not have to prepay for coverage - Claims are paid 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 TPA, which gives the employer greater choice and flexibility. When selecting a TPA, employers should consider whether the TPA efficiently handles claims, has contacts with stop-loss carriers, has a strong reputation, cost management skills and negotiating clout, has medical expertise on staff, and provides excellent customer service and claims administration.
*Talk to an attorney for self-insured health plan specifics related to your state. This guide is intended for informational use only and uses general statements.
Top 2 Greatest Disadvantages of Self-Insurance:
While self-funding can have its advantages, it can be a lengthy process for employers, and it can sometimes be a long time before they see results. This section outlines other potential disadvantages to self-funding.
Greater risk - The main risks of self-insuring involve situations where claims are higher than anticipated. While stop-loss coverage will protect employers from paying excessive claims in a given year, the cost of that coverage will likely increase, and it may be more difficult to get rates from other stop-loss providers. Claims that are higher than expected in a self-insured plan may also make it more difficult for employers to go back to a fully-insured plan in the future. And, an employer’s assets may be exposed to liability as a result of any legal action taken against the plan. Legal matters in regard to self-insured plans can be complex.
Higher administrative costs - For organizations that choose to run their self-insured plans internally, the administrative costs involved can be significant. However, using TPAs to operate the plans will still likely involve lower administrative costs than those associated with fully-insured plans.
As indicated above, a self-insured health plan is one in which the employer assumes the financial risk associated with providing health care benefits to its employees. Rather than paying fixed premiums to an insurance company - which, in turn, assumes the financial risk - the employer pays for medical claims out of pocket as they are incurred.
It’s important to note that self-insurance may not be the best solution for every organization. But, it’s worth asking us about self-insured plan designs that may save your organization money.
Still Not Sure if Self-Insured Is The Way To Go?
Contact Ty Reid, our Director of Group Health Insurance with more questions around self-insured and fully-insured health insurance plans.
Components of this article were adapted from Zywave. This is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.