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Q: What is a fully insured health plan?
A: A fully insured health plan is one where the employer pays a premium to an insurance company for employee health coverage. The insurance premium is due in advance of the coverage and is actuarially projected to cover anticipated claim costs and the insurance company's overhead, commissions, reserves, various risk charges and taxes. In exchange for the premium, the insurance company assumes the risk of providing health coverage and performs various tasks such as the printing of employee booklets.
Forty years ago, all plans were fully insured and this type of funding was considered the norm. But today, almost 70% of U.S. employers self-fund some portion of their health care plans.
Q: What is a self-funded health plan?
A: A self-funded (or self-insured) health plan is one in which the employer assumes some or all of the risk for providing health care benefits to its employees. The employer can completely redesign the plan if they want. The risk can be minimized by obtaining a stop/loss policy providing specific and aggregate protection against large and numerous claims.
Q: Why do employers self-fund their health plans?
A: There are many advantages in self-funding, the primary advantage being cost savings:
- An employer doesn't pay full state premium taxes, which usually range from two percent to three percent of the monthly insurance premium. In a self-funded plan, premiums are collected only on the excess loss coverage - a fraction of the regular insured premium; therefore premium taxes are substantially reduced.
- In a self-funded plan, you don't pay insurance company risk and retention charges. The employer retains control over the health plan reserves, enabling maximization of interest income. Insurance companies traditionally credit an employer much less than the actual interest/income received from that employer's reserves. The difference between what the insurance company credited an employer and what that employer can earn by its own investments is another advantage of self-funding.
- Insurance companies are subject to state regulations; self-funded plans only to federal regulation, thereby giving an employer almost total control of the plan design. Most states have numerous laws mandating certain coverage for an insured plan written in their jurisdiction. A self-funded plan doesn't have to comply with these state laws unless the state mandates are stricter than the federal guidelines. Therefore, an employer can customize their health plan design focusing on their employees' actual needs and cost savings. Additionally, an employer can contract with Preferred Provider Organizations (PPO) and case management firms, which will assist in decreasing or managing cost for the plan.
- An employer doesn't have to pre-pay coverage, thereby improving his cash flow. Insurance premiums are due in advance. Self-funded plans pay claims as they're presented to the claims administrator, usually 60 to 90 days after medical services are received. Therefore, during the first year of self-funding, an employer pays for only nine to ten months of claims. This improved cash flow can be used to the employer's advantage.
- An employer only pays benefits based on his employees' histories, not someone else's employees. In all but the very largest of health plans, an insurance company pools the experience of its clients. Therefore, an employer often finds itself paying for the poor histories of someone else's employee population. In self-funding, each employer pays only for its own employees' benefits.
Q: With what laws must the self-funded plan comply?
A: The self-funded plan comes under all relevant federal laws, none of which is specifically for self-funded plans. Depending on the company's line of business and size, the federal laws applicable to health plans are ERISA, COBRA, the Americans with Disabilities Act, the Pregnancy Discrimination Act, the Age Discrimination in Employment Act, the Civil Rights Act, and various budget reconciliation acts such as TEFRA, DEFRA, HIPAA, FLMA, Newborn Mother Act, Mental/Nervous Parity Act and ERTA. If you have questions, we will be glad to review the specifics with you.
Q: Is self-funding for everyone?
A: No. The major difference between an insured plan and a self-funded one is that in self-funding the employer assumes the risk for the claims and these claims should be somewhat predictable. Therefore, if the employer is very small, self-funding isn't recommended. Although there are companies as small as 50 employees that do successfully self-fund their health plans, an employer this size should consult us as to the viability of self-funding.
To obtain a self-funded proposal, see Required Information for a Presentation/Proposal.
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