Health insurance is not a one-size-fits-all type of product. There are pros and cons to each type, and individuals and employers should choose the option that best fits their needs. In this blog, we are highlighting self-funded insurance and fully-insured health plans and describing some of the key differences between the two.
What is Self-Funded Health Insurance?
The most common choice of health plan for large employers is self-funded insurance. That’s because these businesses have the financial resources to cover their employees’ medical claims.
In a self-insured health plan, employers collect premiums from their enrollees and take on the responsibility of paying employees’ and dependents’ medical claims. The funds collected by the employer are only paid out when claims occur.
To prevent them from having to pay for catastrophic claims, most employers using a self-funded health plan invest in stop-loss insurance, which reimburses the business for claims that exceed a set amount. Many employers offering this type of health plan contract with a third-party administrator (TPA) to oversee the plan and cover services such as enrollment and claims processing.
What Are Fully-Insured Health Plans?
A majority of employers with fewer than 100 employees choose a fully-insured health plan. In this type of health insurance, employers pay a fixed per-member premium to a third-party commercial insurance carrier that covers their employees’ medical claims. That premium commonly covers administrative expenses and stop-loss and employee fees.
However, the premium typically does not cover deductibles and copays. Why? Because employers using this type of plan generally cost-share with employees through copays and payroll deductions.
Premiums for fully-insured health plans typically vary based on an employer’s size, the characteristics of its employee population and overall healthcare use. Employers using these plans lower their financial risk and encounter a lack of price volatility because the carrier covers any overages from unexpected claims.
Self-Funded Insurance vs Fully-Insured Health Plans: Key Differences
Potential For Cost Savings
The combination of inflation and rising healthcare costs isn’t a positive trend for employers. Self-funded insurance offers more of a potential for cost savings than its fully-insured counterpart. That is because when employees don’t utilize the health plan much, the employer’s costs are lower. And, administrative fees are typically lower with this type of insurance.
Employers who opt for self-insured health plans are not required to pre-pay for their employees’ health plan coverage. Nor do they have any profit margins to pay an insurance company. They only pay for administration, stop-loss insurance and the benefits their members use.
Small businesses benefit from fully-insured plans because they can hand the administration of employee insurance off to the insurance company. Although self-funded insurance typically has lower administrative costs, many smaller companies don’t have the expertise to deal with the tedious and time-consuming tasks this type of health plan requires.
Fully-insured health plans can be implemented quicker than self-funded insurance. That’s because They don’t require an employer to undergo the sometimes lengthy process of selecting a third-party administrator.
For employers looking for more flexibility in and control of the design of their health plan, self-funded insurance is the best option. They can choose the coverage that fits the needs of their employees and avoid paying for what they most likely will not use.
There is a basic difference in financial predictability between self-funded insurance and fully-insured health plans. The premiums for fully-insured plans are typically fixed for a year, whereas those for self-funded ones can’t be 100 percent accurately predicted for a given month.
Fully-insured health plans offer predictability by ensuring employers know in advance their premium costs. It allows them to proactively budget and plan for these consistent costs and encounter fewer monetary variances.
Regulations and Requirements
Although fully-insured health plans are subject to state mandates, self-funded insurance is only regulated under the Employee Retirement Income Security Act (ERISA). Also, because employers providing self-funded insurance are not required to pay state premium, broker and insurance commission taxes, they are considered less regulated.
If you want to focus on building your business — not the hassle of health insurance for your employees — consider working with the employer services team here at StenTam. We offer comprehensive employer services to help you build and refine best-in-class benefit solutions. Contact us today to find out how easy — and affordable — it is to get a comprehensive benefits strategy customized to meet your specific business needs.