Employees are not the only ones who have to choose the right insurance plans. Employers of all sizes have options when it comes to offering benefits to their employees.
In the health insurance marketplace, there are generally two types of plans an employer can choose: fully-insured and self-funded.
While each plan has its own benefits and disadvantages, it’s a good idea to periodically evaluate what each one would mean for you and your business.
What is the Difference Between Fully-Insured and Self-Funded Insurance Plans?
A fully-insured insurance plan means an employer pays a fixed premium to an insurance carrier, which assumes the risk and manages claims. In contrast, a self-funded plan involves the employer directly covering healthcare claims, offering more flexibility but also greater financial risk.
Fully-Insured Plans
Fully-insured plans are the traditional model for employer-sponsored health insurance. Under this type of plan, employers pay a set premium to an insurance provider, which then takes on the responsibility of managing claims and covering medical expenses.
This predictable cost structure helps employers budget more accurately since the premium amount generally remains the same throughout the policy period.
Pros:
- Financial predictability: Employers can forecast their annual health costs with more certainty.
- Risk management: The insurance carrier assumes financial risk, providing stability even during years with high claims.
- Administrative ease: The provider handles claims processing and compliance, thereby reducing the administrative burden on HR teams.
Cons:
- Potentially higher costs: Premiums often include administrative fees and profit margins for the insurer, which can make fully-insured plans more expensive over time.
- Less flexibility: Employers have limited control over plan design and may not tailor benefits as closely to employees’ needs.
- Limited savings: Employers won’t benefit from surplus funds in low-claim years, as these go to the insurance carrier.
The fully insured option suits companies looking for stability and reduced administrative work and who prefer to avoid the risks associated with directly covering healthcare claims.
Fully-Insured Plan Example
Imagine a mid-sized retail company with about 200 employees. To simplify its health benefits, the company opts for a fully insured plan. Each month, it pays a fixed premium to an insurance carrier, say $150,000, regardless of how many claims are filed.
When an employee visits the doctor or undergoes treatment, the insurance carrier handles the claim and pays for the expenses. This structure provides the company with financial predictability, even if claims spike due to an unexpected flu outbreak or several costly medical procedures in one year. However, if the claims are lower than expected, the company won’t see any financial return because the insurer retains the surplus.
Self-Funded Plans
Self-funded plans, also known as self-insured plans, allow employers to cover employees’ medical claims directly rather than paying a fixed premium to an insurance carrier. With this model, employers often partner with a third-party administrator (TPA) to manage claims and ensure compliance, but the financial risk and rewards rest with the company.
Note that under the ACA, according to The Institute for Health Care Consumerism, self-funded plans are NOT:
- Required to provide coverage of essential health benefits (EHB)
- Required to participate in a risk-adjustment system
- Subject to single-risk pool standards
- Subject to 3-1 age pricing compression and other rating mandates
- Subject to medical loss ratio (MLR) mandates
- Subject to review of premium increases
- Subject to the annual insurance fee
Pros:
- Cost savings potential: Employers can save money during low-claim years by avoiding insurers’ fixed premiums and administrative margins.
- Plan customization: Self-funding provides more control over plan design, enabling employers to tailor benefits to suit their workforce’s needs better.
- Transparency: Employers have greater insight into healthcare costs, which can inform decisions to optimize benefits and spending.
Cons:
- Financial risk: Employers are exposed to potentially high costs in years with significant claims, which can strain cash flow.
- Complex administration: Managing a self-funded plan can be more demanding, often requiring partnerships with TPAs or in-house expertise.
- Compliance responsibility: Employers must ensure adherence to healthcare regulations, which adds another layer of complexity to HR operations.
Self-Funded Plan Example
Imagine a tech company with 500 employees that opts for a self-funded plan. It decides to pay healthcare claims as they arise and set up a reserve fund to manage potential high claims. The company collaborates with a TPA for claims processing and compliance.
In a year with low claims, the company benefits by retaining any unspent funds, which can be significant cost savings compared to fixed premiums. However, in a year when several employees need expensive surgeries or extended hospital stays, the company could face higher-than-anticipated costs.
To mitigate this risk, the company purchases stop-loss insurance, which kicks in and covers claims above a certain threshold (e.g., $200,000), helping protect against extreme financial impact.
Choose the Best Plan for Your Company and Employees
When it comes to running a company, there’s a laundry list to think about – including employee benefits. Your options include fully-insured and self-insured, and your choice boils down to how involved you want to be in the process and if your organization can handle financial risk.
Both options have clear pros and cons, so it’s important to evaluate your options every few years as your company grows and hits new financial goals. Doing so will not only benefit the business finances but help offer a better benefit solution for your employees.