Fully Insured Versus Self-Funded Health Plans
There's more than one way to fund health insurance. Below are two of the key options.
A fully insured health plan is purchased through an insurance carrier. Typically, the process is as follows:
- The employer negotiates the best rates possible with the insurance carrier.
- The employer agrees to pay a monthly premium to the insurer; the monthly premium is based on how many employees are in the plan.
- The employee pays for their insurance premiums via payroll deductions and is responsible for any copayments or deductible amounts, as outlined in the policy.
- The insurer assumes all legal and financial risks and pays all medical claims.
Since all claims are managed by the insurance carrier, the employer has more time to focus on its business. Also, costs are fairly predictable. Unless the number of employees enrolled in the plan changes, the employer's premium rate remains fixed throughout the contract year.
However, premium rates can change drastically at the start of the next contract year if the insurance company finds that it will be at a financial disadvantage.
For example, an employee's out-of-pocket maximum is $7,000, but they accumulate $50,000 in medical bills for the year. The insurer cannot increase your premium during the contract term because it agreed to pay all claims for that period. What it will do at the start of the next contract year is hike your premium based on incurred medical claims.
Also, insurers often increase employers' premium rates at the start of the contract year if the cost of providing health care services is likely to rise. The employer can agree to pay the new amount or shop around for a better deal.
With a self-funded (or self-insured) plan, the employer pays for all employee medical claims and operates the plan on its own, instead of buying a fully insured plan from the insurer. As a result, the employer does not have to deal with premium increases that are intended to boost the insurer's profit margin, as is the case with fully insured plans.
Still, self-insured employers must pay fixed costs, such as administrative fees and any stop-loss insurance premiums or per-employee charges. They must also pay variable costs, such as employee medical claims, which fluctuate from month to month, according to the scope of health care services used by employees and their dependents.
The biggest drawback of a self-funded plan is that the employer assumes all risks. For instance, unexpected claims could morph into catastrophic losses, which the employer would be liable for. Some employers protect themselves against such outcomes by purchasing stop-loss insurance, which comes into play for unexpected catastrophic claims.
Due to the financial risks involved, smaller companies are usually hesitant to self-insure. However, for a business that doesn't have many claims, a self-funded plan may be beneficial since it removes some of the costs associated with fully insured plans — thereby making it easier to offer employees lower premiums.