By Stacy Kahan, CLU®, RFC ®, President, Lang Financial Group

Employers in the United States provide healthcare benefits coverage to more than 140 million workers. Approximately 61% of them are covered under self-funded health plans. That number, according to a report by Statista, is up from 44% in 1999.

Surprised? If so, you aren’t alone. There are still many employers who are not familiar with the self-funded health plan. But by transitioning from a fully-insured health plan to a self-funded health plan for your employees, you can save — big — on healthcare costs. That’s why it’s good for you to understand what self-funded health insurance means, how it differs from fully-insured health plans, and the pros and cons of a self-funded health plan.

Self-Funded Health Insurance – An Overview

Employers who choose self-funding health insurance for their employees typically set up a dedicated claims fund to collect money for settling employee health claims as they are submitted.

In simple terms, employers take on the financial responsibility of the healthcare claims and benefits of their workers. Even though third-party administrators (TPA) handle the settlement of the claims, the employers bear the cost.

How a Self-Funded Health Plan Is Different from a Fully-Insured Health Plan

Both fully-insured and self-funded health plans operate on the same fundamentals. The funds are collected and used to bear the medical expenses of the insured workers, and the insurance timelines and terms are mentioned in a detailed policy document. So, how are they different?

In the case of a fully-insured health plan, employers pay fixed premiums to insurance companies to bear the workers’ medical expenses and settle their claims. Therefore, if the premium collected exceeds the medical expenses, the balance stays with the insurance company, and vice-versa. However, in the case of a self-funded health plan, medical expenses are paid by the employer. The employer hires a TPA to handle the settlement of claims but they are paid using the company’s funds.

By choosing a self-funded health plan, as an employer you get more freedom to design your workers’ health insurance plan and the coverage you wish to offer. Other benefits of self-funded health plans include:

  • Zero pooling risk: Since the risk pool is limited to the employer, there’s no pooling risk associated with self-funded health policies. Moreover, all self-funded health plans are covered under the Employee Retirement Income Security Act (ERISA).
  • Reduced administrative fees: Like fully-insured health plans, self-funded health plans also need to pay for processing the claims, network accessibility, and stop loss coverage. However, the fees are lower than those charged with fully-insured health plans.

4 Reasons Why You Should Transition from a Fully-Insured to a Self-Funded Health Plan

Here are four reasons to transition from a fully-insured health plan to a self-funded health plan:

1. To Take Control of Your Healthcare Spend through Transparency

By moving to a self-funded health plan, you have better control over your healthcare spend since you can see the type of claims being paid and how they will affect the future fund. Not only this, but you can avoid some costs — premium state taxes are not included, for example.

2. To Pay Claims in Real-Time

One of the most significant advantages of self-funded insurance plans is the timeline claims are paid – it’s much faster. Plus, when you use a well-run TPA to settle claims, you’ll have a more personal relationship with the TPA than you’ll have with an insurance company, which makes for a good working relationship.

3. To Customize Your Employee Healthcare Plans

Self-funded health plans allow you to customize the healthcare plans per the needs of your employees and your healthcare budget. If you have a diverse group of employees, it’s difficult to offer a fully-funded plan that works for everyone. A self-funded health plan makes it easy to deliver value to each of your employees.

4. To Improve Your Cash Flow

Better cash flow is another reason that many employers transition to self-funded health insurance. Unlike fully-insured health plans that require employers to pay fixed premiums, self-funded health plans provide employers with more flexibility and the freedom to manage workers’ healthcare costs. For small companies with no more than 50 employees, there are many plans that offer a level-funded claims fund to even out cash flow.

Over the years we have transitioned many employers from a fully-insured plan to a self-funded plan. We’re available to help determine if it’s the right move for your organization. To start a conversation, contact us here.