Thirty years ago, virtually all plans were fully insured and this type of funding was considered the norm. As indemnity insurance premiums continue to climb, more and more employers are seeking alternatives for funding their health benefit plans. Today, almost 70% of U.S. employers self-fund some portion of their health care plans. top
What is a self-insured health plan?
A self-insured (or self-funded) health plan is one in which the employer assumes some or all of the risk for providing health care benefits to their employees. The employer takes control of the assets of its plan, invests them to his advantage, and eliminates the insurance company charges. The employer then has the ability to completely redesign the plan or keep the original plan. top
Why do employers self-insure their health plans?
There are many advantages to self-funding, the primary advantage being cost savings:
- Allows for the customization of plan design including service inclusions/exclusions, deductibles, out of pocket requirements and benefit maximum limitations. No more cookie cutter plan desgins offered by the big insurance carriers.
- Employer doesn't pay state premium taxes, which usually range from 2 percent to 3 percent of the monthly insurance premium.
- In a self-insured plan, you don't pay insurance company risk charges and retention charges.
- The employer retains control over the health plan reserves, enabling maximization of interest income.
- Insurance companies are subject to state regulation; self-funded plans primarily to federal regulation, thereby giving an employer more control of the plan design and making it easier if the employer has operations in multiple states therefore requiring multiple insurance company coverage.
- An employer doesn't have to pre-pay coverage, thereby improving his cash flow. Insurance premiums are due in advance where as self-insured claims are paid usually 30-60 days after the services were incurred.
- An employer only pays benefits based on his employees' histories, not someone else's employees. There is no grouping or pooling of experience from all of the insurance company clients. In self-insured plans, each employer only pays for their own employee's benefits up to the reinsurance levels.
With what laws must the self-insured plan comply?
The self-insured plan comes under all relevant federal laws, none of which is specifically for self-funded plans. Depending on the company's line of business and size, the federal laws applicable to health plans are the Employee Retirement Income Security Act (ERISA), the Consolidated Omnibus Budget Reconciliation Act (COBRA), the Americans with Disabilities Act (ADA), the Pregnancy Discrimination Act, the Age Discrimination in Employment Act, the Civil Rights Act, and various budget reconciliation acts such as Tax Equity and Fiscal Responsibility Act (TEFRA), Deficit Reduction Act (DEFRA), and Economic Recovery Tax Act (ERTA). top
Is self-insuring for everybody?
No. The major difference between an insured plan and a self-insured one is that in self-insuring the employer assumes the risk for the claims and these claims should be somewhat predictable. Therefore, if the employer is very small, self-insuring isn't recommended. Although there are companies as small as 25 employees that do successfully self-insure their health plans, an employer that size should carefully review the viability of self-insuring. Also, if the work force is volatile making future claims difficult to predict, self-insuring may not be an option. Volatility of future claims can be smoothed out to a great extent by the purchase of excess-risk coverage. top
What is excess-risk coverage?
Excess-risk coverage is insurance sold to employers who offer self-funded health plans to guard against unacceptable losses. There are two types of excess-risk coverage:
- Specific coverage that insures against a single catastrophic claim that exceeds a dollar limit chosen by the employer and agreed to by the excess-risk carrier. For example, specific coverage would come into play if one of the covered participants was in a catastrophic accident and had claims that exceeded the agreed upon dollar limit. In this case, the specific coverage would reimburse the employer for the covered expenses beyond that dollar limit.
- Aggregate coverage that insures against all the claims exceeding a specific dollar limit chosen by the employer and agreed to by the excess-risk carrier. If all the claims payable exceed the agreed upon dollar limit, aggregate coverage would reimburse the employer for the excess.
Excess-risk coverage protects the employer against unforeseen catastrophic claims that would cost more than is budgeted in the plan and place undue financial burdens on the employer. top
Do I have to redesign my existing health plan?
No, you do not. Self-insuring doesn't require a change in the existing group coverages you offer unless, of course, you want to change them. Some employers have become comfortable with certain plan designs and decide to leave the plan as is for at least the first year of self-insuring. Other employers find that the existing plan is excessively expensive because of an overly generous design and/or difficult administrative burdens. Employers redesign these plans to save money and to simplify the plan. The choice is up to the employer. top
Why should I self-insure my health plan?
Many employers faced with the same question have decided to implement a self-insured health plan. Their reasons include:
- Self-insuring will show a large first-year savings through the lack of premium taxes and various insurance company charges, and first year claim lag.
- Employers can save considerable money through new plan designs that take advantage of the most up-to-date cost containment strategies.
- Self-insuring doesn't affect the plan from the employees' standpoint. There doesn't have to be any noticeable change in the plan unless the employer so wishes.
- The employer receives increased interest from his reserves.
- Every aspect of plan administration becomes subject to competitive market pricing, thereby saving money on such items as claims administration, printing of Summary Plan Descriptions, etc.
- Excess-risk coverage is available to insure the employer against unforeseen adverse claims experience.