The United States boasts numerous types of businesses in a wide array of industries. Small businesses, S- and C-corporations, joint ventures, nonprofits and cooperatives are just a few of them.
What’s the difference between a small business and a large company, though? As noted by the Small Business Administration (SBA), companies with fewer than 500 employees are categorized as small businesses; those with 501 or more are defined as large.
The size of a business in the U.S. determines whether it is required to offer health insurance to its employees. Employers with 50 or more full-time-equivalent (FTE) employees have to provide at least minimum essential coverage (MEC) to 95 percent of their FTEs, but companies with fewer than 50 employees do not.
Just as there are multiple types of business, the type of health insurance offered by employers also varies. Fully-insured plans, level-funded plans, individual coverage health reimbursement arrangements (ICHRAs) and self-insured health plans are the most common.
What Is Self-Funded Insurance?
Along with level-funded plans, self-funded coverage is a popular alternative to traditional health insurance. As defined by Healthcare.gov, self-funded insurance is usually present in larger companies where the employer itself collects premiums from enrollees and takes on the responsibility of paying employees’ and dependents’ medical claims.
These employers can contract for insurance services such as enrollment, claims processing and provider networks with a third-party administrator (TPA) or insurance carrier, or they can be self-administered. Both public and private employers can utilize a self-funded plan to provide insurance to their employees, and 65 percent of covered workers in the U.S. are covered by this type.
Many large businesses select self-funded health insurance for their employees, primarily because they have the financial resources to cover their employees’ medical claims. Covered workers in large firms are significantly more likely (82 percent) to be in a self-funded plan than covered workers in smaller businesses (20 percent.) However, self-funded plans have grown steadily as a share of the insurance market over the past 15 years and now include many employers with fewer than 200 employees.
To prevent them from having to pay for catastrophic claims, a majority of employers providing self-funded insurance to their employees purchase stop-loss insurance. As we mentioned in a previous blog, stop-loss insurance reimburses the employer for claims that exceed a set amount. At businesses with 200 or more employees, 72 percent of covered workers in a self-funded health plan are in one that has stop-loss insurance; 93 percent of employees working for companies with more than 5,000 employees are in self-funded plans.
Benefits of Self-Funded Health Insurance
Potential Cost Savings
Though not always, self-funded insurance is often less expensive than fully-insured health plans because companies don’t have any profit margins to pay an insurer. Also, there’s more of a potential for cost savings because administrative fees are typically lower with this type of plan. Although not required, most employers providing self-funded plans contract with a TPA or insurer.
Higher Cash Flow
When employees’ medical claims are lower than expected, employers providing self-funded health insurance are able to retain those funds. They’re also not required to pre-pay for their employees’ health plan coverage.
Unlike many other types of health insurance offered by employers, self-funded plans are only regulated under the Employee Retirement Income Security Act (ERISA), not state mandates. These plans don’t have to satisfy mandates from the Affordable Care Act (ACA).
Increased Visibility into Claim Trends
Employers offering self-funded insurance can access and view claims utilization data and make decisions based on trends to better manage costs. Adjustments for coverage can be made the following year depending on those trends.
Fewer Premium Taxes
With self-funded insurance, employers don’t have to pay state premiums, broker and insurance commission taxes. Such taxes are typically two to three percent of the dollar value of an employee’s health insurance premium.
Cons of Self-Funded Plans
Sometimes, the cost fluctuations and unpredictability that occur with a self-funded insurance plan can negatively affect a business’s cash flow. There’s also a higher risk of fraud or abuse from someone within the company. For companies whose employers have higher health risks, self-funded insurance can lead to higher costs.
Increased Administrative Burden
Again, some employers providing self-funded health insurance to their employees collaborate with a TPA to handle administrative tasks. If not, though, the business is responsible for administrative tasks an insurance company would typically perform, including
- Designing plan benefits
- Enrolling employees and covered dependents in the plan
- Issuing plan documents and ID cards
- Approving and paying claims for employees and their covered dependents
- Coordinating with healthcare providers
- Making sure the plan complies with legal requirements
Is Self-Funded Insurance Good for Employees?
According to the Health Care Administrators Association (HCAA), the two most common reasons employers choose self-funded insurance are:
- The employer can customize the plan to meet the specific healthcare needs of its workforce as opposed to purchasing a ‘one-size-fits-all’ insurance policy.
- The employer is free to contract with the providers or provider network best suited to meet the healthcare needs of its employees.
Figuring out the best type of health insurance to offer your employees can be a confusing and time-consuming process. That’s why it’s best to work with an employer services partner like StenTam. We have expertise in assisting companies of all sizes with developing a comprehensive benefits strategy customized to meet your specific business needs. Contact us today to get started!