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What is a self-funded health insurance plan?

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  • A self-funded health insurance policy is run by an employee’s employer
  • Employers can buy insurance to cover large medical claims
  • Self-funded insurance companies can offer lower premiums than traditional insurance companies

A group health plan can be either self-funded or fully funded. A self-funded plan requires the employer to assume all the financial risks in regards to providing health insurance to its employees. The biggest difference between a self-funded and fully-funded health insurance policy is the way claims are paid.

In a self-funded health insurance plan, employers pay each claim out of pocket as it incurs. In comparison, a fully-funded health insurance plan requires the employer to pay a fixed premium to an insurance carrier.

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Where does the money come from for a self-funded insurance plan?

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If your employer is considering a self-funded insurance plan, you’re probably curious as to where the money will come from to pay the claims. In most situations, employers set up a special trust fund. In this fund, corporate and employee contributions are gathered and earmarked to pay incurred claims. Although a self-funded plan is not as popular as fully funded insurance plans, it is rather common.

How many self-funded insurance plans are there in the United States?

In 2000, the Employee Benefit Research Institute (EBRI) released a report regarding self-funded health insurance plans. Per this report, nearly 50 million employees and their dependents were enrolled in a self-funded insurance plan sponsored by their employer. At this time, the report represented 33 percent of 150 million insured individuals in the private employment-based plans in the nation.

What are the benefits of a self-funded health insurance plan?

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There are many reasons an employer may consider a self-funded health insurance plan. Usually, the decision to opt for a self-funded plan rather than a traditional health insurance plan is because it fits the employer’s business model better. Below are some of the most popular reasons an employer may opt for a self-funded health plan rather than a fully-funded plan:

  • Plan is easier to customize for a workforce
  • Employer is in control of the plan
  • Interest income can be maximized through investment
  • Coverage does not have to be pre-paid
  • Improves an employer’s cash flow
  • Not subject to state health insurance regulations/benefit mandates
  • Reduction in state health insurance premium taxes
  • Employer is free to contract with providers they deem suitable for the workforce

Even with the advantages mentioned above, a self-insurance plan may not be the best option for every employer and workforce.

Who is a self-insurance health plan suited best for?

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There are a few careers, employers or workforce that benefit from a self-insurance health plan much more than any other career.

Primarily, for an employer to even consider this option for its staff, it must have the financial resources to do so. What this means is it must have reserves dedicated to paying claims. Since medical claims can be unpredictable, it is a hard budget to create and overages can be detrimental.

Any business that struggles with cash flow on a regular basis or has poor cash flow shouldn’t consider a self-funded health insurance plan. It’s important to remember that a company doesn’t have to be huge to have a successful health insurance plan. Some companies with as little as 25 people have been able to maintain a self-funded health insurance plan.

How can employers protect themselves from unpredictable medical claims?

Big companies have the financial resources to cover just about any health care costs. For those that don’t have large amounts of cash on hand, a stop-loss insurance policy may be a good idea. Stop-loss insurance coverage can be used to reimburse an employer up to a pre-determined amount of money. A stop-loss policy is not health insurance but is considered a contract between an employer and an insurance company.

Who administers a self-funded insurance plan?

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A self-funded insurance plan can be managed in-house or be subcontracted to a third party, also known as third party administration (TPA). If the claims are not handled in-house, a TPA will be responsible for setting up a group health plan and coordinating any stop-loss insurance coverage that might be needed.

Additionally, a TPA might draw up provider network contracts and process utilization review services.

Who handles payroll deductions in a self-funded plan?

Just like a fully funded health insurance policy, employees and employers still make contributions. The contributions are deducted via payroll deductions.

The biggest difference in this process is where the money goes after it is deducted. Instead of being sent to an insurance company, the payroll deductions are kept in-house and held by the employer until a claim was filed.

If the deductions are being used as reserves, it is put in a tax-free trust, which is controlled by the employer or a third-party administrator.

Are there laws that self-insured group health plans must follow?

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Self-insured group health plans are required to abide by all federal laws. Specifically, a self-funded health insurance plan is governed by:

  • Employee Retirement Income Security Act (ERISA)
  • Health Insurance Portability and Accountability Act (HIPAA)
  • Consolidated Omnibus Budget Reconciliation Act (COBRA)
  • Americans with Disabilities Act (ADA)
  • Pregnancy Discrimination Act
  • Age Discrimination Act
  • Civil Rights Act
  • Tax Equity and Fiscal Responsibility Act (TEFRA)
  • Deficit Reduction Act (DEFRA)
  • Deficit Reduction Act (DEFRA)

Disadvantages of a Self-Funded Health Plan

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While we’ve discussed the significant benefits of a self-funded health plan, it’s time to discuss the drawbacks. One of the biggest disadvantages associated with this type of health insurance is liability.

In a self-funded health insurance plan, the company’s assets are liable. What this means is if there is not enough cash or a stop-loss policy, the company’s assets may be at risk if a debt needs to be settled. The other significant disadvantage is the inability to determine how much money will be used by the plan on a monthly or even yearly budget.

The number of claims can fluctuate significantly from one month to the next. With a fully-funded health insurance policy, the employer knows exactly what his financial obligations are month to month, which ensures he can create a workable budget.

A self-funded health insurance plan can save employers thousands in taxes and improve cash flow. Before any company opts to put this type of program in place, it’s important to do all the research and make sure it’s a flexible program. Failure to follow the guidelines for this type of program can have significant problems and can even cause a company to collapse.

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