Self-insured (self-funded) health plan are a great alternative to purchasing a fully insured plan from an insurance carrier. Employers choose to self-insure because it allows them to save the profit margin that an insurance company adds to its premium for a fully-insured plan. However, self-insuring exposes the company to much larger risk in the event that more claims than expected must be paid.
So, what’s the difference between a fully-insured and self-insured health plan?
A fully-insured health plan is 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, based on the number of employees enrolled in the plan each month.
- The monthly premium only changes 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 outlined in the policy purchased.
With a self-insured (self-funded) health plan, employers (usually larger) operate their own health plan as opposed to purchasing a fully-insured plan from an insurance carrier.
- Fixed costs and variable costs are the two costs to consider.
- Fixed costs include: administrative fees, any stop-loss premiums, aggregated stop loss and network rentals.
- Variable costs include: payment of health care claims.
Is your company a fit for self-insurance?
Since a self-insured employer assumes the risk for paying the health care claim costs for its employees, it must have the financial resources (cash flow) to meet this obligation, which can be unpredictable.
Small employers and other employers with poor cash flow may find that self-insurance is not the right fit for them.