A self insured plan (or “self funded” plan) is an arrangement whereby an employer assumes the risk and provides group health benefits directly to employees with its own funds.
This is different from a fully insured plan where the employer pays premiums to an insurance company which assumes the risk and provides the benefits to participants. In a self-funded plan, the employer assumes the direct risk for payment of the claims for benefits. The eligibility and schedule of benefits are set forth in a plan document which includes provisions similar to those found in a typical group health insurance policy.
Total self-insurance is pretty rare. In order to mitigate the risk and provide an extra measure of financial protection against catastrophic claims, most self-funded employers purchase stop loss coverage. These policies typically provide for risk retention both on an individual catastrophic claim basis (specific stop loss) and on an aggregate claims basis (aggregate stop loss).
While Aggregate and Specific Stop Loss protection do limit maximum employer liability, there is some risk that is not transferred to the insurance carrier. The employer must be willing to trade the complete security (and associated cost) of a fully insured plan for the possibility that actual cost will exceed what the fully insured plan would have cost.
Before the Employee Retirement Income Security Act (“ERISA“) legislation was passed in 1974, employers faced many state laws that required them to be licensed insurers in order to self-fund their own employee benefit plans. Passage of ERISA removed those barriers and larger employers quickly began self-funding their health plans.
Self Insurance In Medium Sized Businesses
Although some myths persist to the contrary, employers with as few as 100 employees now self-fund their health plans. Lower middle market employers (between 100 and 500 employees) find that they have sufficient scale to reduce operating costs significantly, while gaining greater control of benefit plan design.
Advantages of self-insurance include the following:
- Elimination of premium taxes. In most states, there is no premium tax for the self-funded claim fund; thus, an immediate savings equal to the amount of the premium tax (approximately 2% to 3% of the total cost of the plan) is realized.
- Lower cost of operation. Employers frequently find that administrative costs for a self-funded program through a professional TPA are lower than those being charged by their previous insurance carrier.
- Carrier risk charge is eliminated. The risk charge of an insurance carrier is eliminated which usually results in 2% to 4% in savings.
- Cash flow benefit. The employer’s cash flow is improved when money formerly held by the insurance carrier in the form of various reserves, such as for unreported claims and pending claims, is freed for use by the employer.
- Return on investment for reserves. Interest on reserves established by the employer remains under the employer’s control.
- Control of plan design. The self-funded employer has greater flexibility in the plan design.
- Mandatory benefits avoided. State regulations mandating costly benefits are avoided because self-funded programs are subject to ERISA which preempts state law. Thus employers can have the identical benefits in every state where their employees reside.
- Administration tailored to the employer’s needs. The employer usually has a choice of third-party administrators, each of whom is interested in providing the employer with flexible services that are purchased a la carte to meet the employer’s needs.
Even with all these advantages, a number of large and mid-sized employers still remain fully insured. Oftentimes, they may stay fully insured because they believe that self-insurance:
- Entails taking on too much risk.
- Plan set-up will take a significant amount of internal time and resources due to its complexity.
- Is not feasible, due to poor or self-serving advice from their broker.
While there are some legitimate reasons to stay fully insured, many small & mid-sized employers that shy away from self-insurance are doing so without fully investigating their options. With self insurance, you will need to obtain advice from expert actuarial consultants for setting up the plan, analyzing the risk and employing sound risk management techniques.
Brad Gauen offers managers at mid-sized organizations at least 20 different strategies for reducing their employee healthcare costs. His almost 30 years of experience includes creating and pricing insurance products for an insurance company, and shepherding Fortune 500 clients’ employee benefits programs. Today, he brings that actuarial benefit plan consulting expertise to middle market employers with between 100 and 3,000 employees.