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Guide to Fully-Insured vs. Self-Funded (Self-Insured) Health Plans

What is a Self-Funded Health Plan?

With a self-funded (self-insured) health plan, employers operate their own health plan as opposed to purchasing a fully-insured plan from an insurance carrier.

Employers opt to self-insure because it allows them to save money if claims are at or below the expected level. However, self-funding exposes the company to greater risk if the amount of claims are more than expected. 

The two main cost to consider in a self-insured health plan are fixed costs and variable costs.

The fixed costs include administrative expenses, any stop-loss premiums, and any other set fees charged per employee. These costs are billed monthly by the TPA or carrier, and are charged based on plan enrollment. 

The variable costs include the actual cost of health care claims. These costs vary from month to month based on health care use by the covered employees.

In order to mitigate risks, 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 employee or to cover claims that greatly exceeded the expected level for the group of covered employees (aggregate coverage). 

What is a Fully-Insured Health Plan?

fully-insured health plan is considered 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 fixed for a year and dependent on the number of employees enrolled in the plan each month. 

The monthly premium will only change during the year if the number of enrolled employees in the plan changes.

The insurance carrier collects the premiums and pays the health care claims based on the coverage benefits specified in the policy. 

The covered persons (eg: employees and dependents) are responsible to pay any deductible amounts or co-payments required for covered services under the policy.

What are the variations of Self-Funded (Self-Insured) Health Plans?

In addition to the types of self-funded health plans discussed above, there are variations of self-insured health plans that help employers reduce the cost of health insurance:

A Partially Self-Insured Health Plan, with an Integrated HRA. One variation of a partially self-insured health plan is to raise the deductible on the group health insurance plan and self-insure the difference with an integrated Health Reimbursement Arrangement (HRA). For example, the company increases the deductible from $500 to $5,000. The company uses an HRA to reimburse employees for up to $4,500 (the difference in the deductible). Using the HRA in this way, the employer is self-insuring the $4,500 additional deductible and seeing costs savings because most employees won’t reach their $5,000 deductible.

A Self-Insured Reimbursement Plan: Another variation is a self-insured reimbursement plan, such as a Small Business Healthcare Reimbursement Arrangement (HRA). Many employers (usually smaller and mid-sized) set up a Small Business HRA to reimburse employees both for individual health insurance premiums and qualified medical expenses – instead of offering a group health plan or an Integrated HRA. A Small Business HRA is not health insurance; rather, it is a way to contribute toward an employee’s health insurance and medical costs without administering a traditional, one-size-fits-all group policy. 

What is referenced based pricing?

Reference-based pricing is a payment methodology that replaces or enhances a health plan’s traditional “usual and customary” pricing for non-contracted claims. Reference-based Pricing can be coupled with a hybrid-funding plan to provide optimum customization and flexibility for employers.  

Rather than calculating the average charge of providers in a geographic area or a similar traditional methodology, a health plan utilizing reference-based pricing instead adjudicates its allowable amount for medical claims based on its chosen metric (most commonly Medicare rates, or a certain percentage above those rates), which is a price that the payor deems reasonable.

What are the benefits of Self-Funding Health Plans?

The largest benefit of self-funding is the potential cost savings when health care claims are low. If the employees are fairly healthy and don’t need to use their health insurance very often, then the employer will save money compared to a fully-insured plan.

With self-funding strategies, employers also avoid paying costly premium tax. Self-funding provides employers the ultimate flexibility to create health plans that are tailored to fit their employees’ health needs while also saving money and increasing your bottom line—something self-insured health plans cannot offer.

Self-funding may seem like the obvious option, but some employers without the time or resources to devote to a more hands-on, complex plan will usually opt for a more simple fully-insured health plan. Self-funding also has specific compliance terms that include non-discrimination requirements and 5500 tax filings, which aren’t always required for fully-insured employers.

There are many different health plan funding arrangements and making the best choice for your company is of the utmost importance.

Contact us at Precision Benefits Group today to see which health plan funding option is best for you, your employees, and your company’s bottom line.

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