There are three types of group health plans that most employers use: self-funded, level-funded, and fully-insured. Though the names may sound self-explanatory, do you truly understand all there is to know about each type? In this blog, we’ll get down into the nitty-gritty details of self-funded insurance.
What is self-funding?
A self-funded, or a self-insured, plan is one where the employer takes on all the risk themselves for providing health care to their employees. In other words, you pay out-of-pocket for any claims that come up instead of paying a premium to an insurance carrier for the company to take care of. Oftentimes, many self-funded employers set up a fund set aside specifically for taking care of their employees’ claims.
Let's see a concrete example.
What are the benefits to self-funding?
Employers like to self-fund for many reasons, and one employer’s reasons may be different from another’s. However, common reasons an employer might self-fund include:
- Customization: You can easily pick and choose how your plan works to meet the specific needs of your employees, rather than purchasing something more “generic.”
- Control: You have control over the money going in and out of the claims reserves. Additionally, because you don’t have to pay premiums, you have more timely control over the funds and an improved cash flow.
- Regulations: You are only subject to federal regulations. You don’t have to deal with state health insurance regulations. You also do not have to pay state health insurance premium taxes.
- Flexibility: You can contract with the provider that best suits you and your employees’ needs.
- Opportunity for Savings: If employees are generally healthy and don’t use the plan very often, your costs will be lower.
Are there cons to self-funding?
Yes, there are pros and cons to every type of health plan. Some common cons include:
- Uncertainty: You have to be financially stable to make sure you can cover any claims that incur.
- Additional Requirements: There are specific and additional compliance requirements that are needed for this type of health insurance. This can include non-discrimination requirements and tax filings.
- Time Management: You will be more hands on and have to take time out of your day to handle any claims that are incurred.
Does self-funded insurance work for everyone?
No. A self-insured employer assumes all the risk for themselves and their employees; therefore, they need to have enough funds to sustain this system. Claims are unpredictable. One month, your employees may have no issues, and another month, the problems may be overwhelming. An employer must be financially stable and willing to deal with this unpredictability. As a result, startups and businesses with poor cash flow may find self-funded insurance to be difficult.
Finding the best policy for your needs is up to you. It could be self-funded, yes, or it could be level-funded or fully-insured.
What happens if a catastrophic claim occurs, and I don’t have enough cash in my reserves to pay?
Most self-funded employers purchase something called stop-loss insurance. This insurance plan helps to reimburse an employer if their claims go over a pre-specified amount.
Read more about stop-loss insurance in our blog: Understanding Stop-Loss Insurance.
I still have questions. What should I do?
We’re here to help. If you want to know more, check out some more of our blogs: Self Funded vs Fully Insured vs Level Funded Plans | Blue Ridge Risk Partners, Level-Funded Insurance: the Ins, Outs, and Everything In-Between, What to Know About Fully-Insured Insurance, or Understanding Stop-Loss Insurance.
Contact us! We’ll get you the right information to help you on your insurance journey.