When it comes to providing health insurance for employees, employers generally have two main options: fully-insured plans and self-insured plans. In a fully-insured plan, the employer pays a premium to an insurance company, and that company takes on the risk of covering employees’ healthcare costs.
With a self-insured plan, the employer takes on the risk themselves, paying directly for their employees’ healthcare claims. This can be a complex decision for employers, as they try to balance the rising cost of healthcare with the need to offer competitive benefits to attract and retain talent.
Deciding between self-insured vs fully-insured health coverage is a big decision for employers. In this article, we’ll compare the two models, outlining the pros and cons of each to help you determine which option is right for your business.
Fully-Insured Health Plans: Predictability and Simplicity
With a fully-insured health plan, an employer pays a set premium to an insurance company. The insurance company then takes on the risk of paying for employees’ healthcare costs.
Premiums are typically determined either by looking at what other similar companies are paying or by considering the demographics of the employer’s workforce.
Advantages of Fully-Insured Plans
- Predictable monthly costs. It’s easier to budget when you know how much you’re going to pay each month.
- Reduced administrative burden. The insurance company handles the claims, makes sure the plan is compliant with regulations, and takes care of other administrative tasks.
- Risk mitigation. If claims are unexpectedly high, the insurance company covers those costs.
Disadvantages of Fully-Insured Plans
- Limited control over plan design. Employers have less say in what the plan covers.
- No benefit from favorable claims experience. If claims are lower than expected, the employer doesn’t get any of that money back.
- Potentially higher long-term costs. Premiums may be higher because the insurance company is factoring in its own risk and administrative costs.
Self-Insured Health Plans: Flexibility and Control
Self-insured health plans offer companies more flexibility and control over their employees’ healthcare, but with that comes some added risk. Here’s a look at how these plans work and what you need to consider.
How Self-Insured Plans Work
Instead of paying premiums to an insurance company, employers with self-insured plans pay for their employees’ healthcare claims directly. Many companies partner with a Third-Party Administrator (TPA) to handle the nuts and bolts of claims processing and other administrative tasks. But ultimately, the employer is the one footing the bill.
Advantages of Self-Insured Plans
- More flexibility: Employers can tailor their benefits packages to fit the unique needs of their workforce.
- Potential cost savings: If claims are lower than expected, the company pockets the savings.
- Increased control: Access to claims data gives employers better insight into healthcare spending, allowing for more informed decisions.
- Avoid paying for unused services: You’re not paying premiums for coverage that goes unused.
Disadvantages of Self-Insured Plans
- Financial risk: The company is responsible for covering all claims, which can be unpredictable and potentially very expensive.
- Administrative burden: While TPAs can help, there’s still more administrative work involved compared to fully-insured plans.
- Variable cash flow: Healthcare costs can fluctuate, making budgeting a challenge.
Mitigating risk in self-insured plans: Stop-loss insurance and TPAs
Self-insuring comes with some risk, of course. Here are some ways companies can handle the financial risk.
The role of stop-loss insurance
Stop-loss insurance protects employers from catastrophic claims by reimbursing them for claims that go above a certain level, whether for an individual or in total.
This type of insurance is essential for managing financial risk when you’re self-funding your company’s health insurance.
The role of third-party administrators (TPAs)
Third-party administrators handle the administrative side of offering health insurance. They process claims, handle enrollment, provide customer service, and make sure the plan is compliant with all applicable laws and regulations.
TPAs also give employers access to provider networks and negotiate discounts with doctors and hospitals. Plus, they offer data analytics and reporting to help employers understand their healthcare spending and find ways to save money.
How do self-insured plans control costs?
Self-insured plans have several ways to keep costs down. The most common include:
- Data-driven decisions. Because self-insured plans have access to claims data, they can see exactly where their money is going. This allows them to make smarter choices about healthcare spending.
- Customized coverage. Self-insured plans can design their benefits to fit the unique needs of their employees. This improves flexibility and personalization.
- Wellness programs. Many self-insured plans offer programs that encourage employees to be healthier.
- Telehealth. Telehealth services allow employees to access care remotely, reducing the need for expensive in-person visits.
- Strategic partnerships. Self-insured plans often partner with high-quality vendors and providers to negotiate better rates.
- Pharmacy Benefits Management (PBM). PBMs help manage prescription drug costs by negotiating discounts with pharmacies and drug manufacturers.
Health Reimbursement Arrangements (HRAs): A Third Option
If you’re not sure about a fully-insured or self-insured plan, you might consider a Health Reimbursement Arrangement (HRA). HRAs offer a middle ground between the two.
With an HRA, you can enjoy some of the cost savings of a self-insured plan while reducing your risk and administrative burden.
There are a few different types of HRAs:
- Qualified Small Employer HRA (QSEHRA): for small employers
- Individual Coverage HRA (ICHRA): for employees who choose their own plans
- Integrated HRA (GCHRA)
With each of these, employers can reimburse employees tax-free for qualified medical expenses.
Frequently Asked Questions
Is it better to be self-insured?
Whether self-insurance is “better” depends entirely on your company’s specific circumstances. If you’re a larger, financially stable organization with predictable healthcare costs, self-insurance can offer significant cost savings and greater control over plan design. However, smaller businesses or those with fluctuating healthcare expenses might find the stability and risk management of a fully-insured plan more appealing. There’s no one-size-fits-all answer; it’s about finding the best fit for your unique needs and risk tolerance.
What are the disadvantages of self-insured plans?
Self-insured plans come with their own set of challenges. The biggest is the potential for unpredictable healthcare costs. A single catastrophic claim can significantly impact your budget, requiring careful planning and stop-loss insurance. Furthermore, managing a self-insured plan requires administrative expertise, or outsourcing to a TPA, which adds to the overall cost. Compliance with ERISA regulations and state laws can also be complex. You’re essentially taking on the financial risk that an insurance company would typically bear, so it’s crucial to be prepared for potential volatility.
In Summary
When choosing between a fully insured and a self-insured health plan, it’s essential to weigh the pros and cons. With a fully insured plan, you’ll have more predictable costs and less administrative work, but you’ll also have less control over the plan’s design. A self-insured plan offers greater flexibility and the potential for cost savings, but it also comes with more risk and administrative responsibilities.
The best choice for your organization will depend on factors like your company’s size, your risk tolerance, and how important it is for you to have predictable healthcare costs. It’s important to carefully evaluate your options and talk with benefits professionals to find the plan that’s right for your company.