Today’s health insurance industry features enough complexity to deter even the most determined people from diving in and learning more. Even for HR and benefits professionals working on behalf of an employee population, the amount of laws, regulations, and technical terms can be tough to tackle. For example, one of the most important topics for a growing company is the differences between fully-funded and self-funded insurance plans and why one plan may be a better option for them over the other.
The key differences between self-funded and fully-funded insurance plans comes down to the question of who pays member’s claims, who assumes insurance risk, and who saves money when claims are lower than expected.
With the rising cost of healthcare becoming a larger issues for businesses of all sizes, it’s never been more critical for wellness professionals to know the pros and cons of these two popular insurance plans.
In this blog, we will dive into:
- What fully-funded and self-funded insurance plans exactly are
- How these they each function,
- When to choose between them
And while all topics that have enough detail for individual blog posts of their own, but today we will look at things from a high level.
The most fundamental difference between fully- and self-funded insurance plans comes down to one question: “who is going to assume the risk?” In this case, risk pertains to insurance risk, or who is going to pay the hospital when an employee needs to go to the doctor?
A fully-funded insurance plan is structured so that an employer purchases health coverage from an insurance carrier for a per-member premium. While relatively stable, these premiums can fluctuate based on the size of the company, employee health, and healthcare usage.
Employers are attracted to fully-funded plans for many reasons, but having the healthcare provider shoulder most of the financial responsibility of the plan could make a lot of sense in the right situation.
- The insurance provider assumes the risk that the employees will use their healthcare, and pays for that in accordance with their selected plans.
- However, if the employees are healthy and don’t use the healthcare, the employer still pays the same amount
- If there’s a difference between the amount of healthcare that an employee uses and the premium that the employer paid, the money is essentially lost to the employer
That risk comes with a trade-off.
Traditionally, fully-funded insurance plans have been better for small companies—in 2009 the Society for Human Resources Management noted that companies with less than 1,000 members traditionally find more opportunity going fully-funded, but that top-line number has come down dramatically in recent years—who don’t have the financial capacity to deal the logistics of paying for employee health costs. However, with the rising cost of healthcare in the past few years, many small businesses are looking for a way to contain their costs by any means necessary.
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In a self-funded plan, the risk transfers over to the employer, but so do the potential benefits. Under this arrangement, employers will partner with an insurance carrier or a Third Party Administrator (also known as a TPA) to provide the tangible employee coverage, but the employer shares responsibility for members’ claims.
In comparison, the money that would normally be going to the insurance carrier in a fully-funded plan is now being spent by the employer. The upside to this is that in a fully-funded plan, the employer would not be compensated if there’s a portion of the premium that isn’t used. At a certain point, employers save money by switching to a self-funded plan because they save money if employees are healthy. The less claims the have, the less money they spend. No fixed premium to worry about.
However, if employees file a lot of claims in a year, the expenses can add up quickly with the employers funding them all.
- To mitigate this, employers often invest in what’s called “stop-loss” insurance, which shifts the liability for payments back to the insurance company if costs rise above a certain deductible
- On one hand, stop-loss insurance helps to relieve some of the risk of a self-funded plan, but these plans aren’t free
- The trade-off between money saved thanks to self-funded plans and money spent on stop-loss insurance is just another factor in companies that are deciding whether or not to switch
So then the question becomes: when should a company switch?
More often than not, employers are going from fully-insured plans to self-insured plans because of the potential savings in the face of rising healthcare costs.
That trend is continuing. According to a study by KFF, 65% of covered workers are in a plan that is self-funded, up from 44% in 1999.
Another indicator of when employers might make the switch to self-funded is their total number of members. Remember, employee count plays a large factor in determining the premium for a fully-insured healthcare plan because the insurance carrier is agreeing to increased risk due to more employee lives. There’s no hard breakpoint between the efficiency of fully- and self-funded plans, but the healthcare market has changed in the past few years. As noted earlier, 2009 studies showed that 1,000 employee lives was a good point where companies saw the difference between fully- and self-funded plans, but today it is generally less than half of that.
Finally, if an employer is looking to understand where their healthcare spend is going, self-funded plans are the way to go. Since fully-funded plans are organized and run by insurance carriers, getting claims and health data from requires a little extra time and paperwork. In a self-funded situation, the employer is making the payments, and has all that data for themselves.
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