Traditional vs. Self-Funded Health Plans

What is self-funding?

According to the Health Care Administrators Association, in practical terms, self-insured employers pay for claims out-of-pocket as they are presented instead of paying a pre-determined premium to an insurance carrier for a fully-insured plan.

Self-funded or self-insured plans are when the employer assumes the financial risk for providing health care benefits to its employees. Typically, a self-insured employer will set-up a special trust fund to earmark money (corporate and employee contributions) to pay incurred claims.

However, self-funding exposes the company to much larger risk in the event that more claims than expected must be paid. With a self-funded health plan there are two main costs to consider – fixed costs and variable costs.

Fixed costs include administrative fees, any stop-loss premiums, and any other set fees charged per employee. These costs are billed monthly by a third party administrator (TPA) or carrier, and are charged on plan enrollment.

The variable costs include payment of health care claims. These costs vary from month to month based on health care used by employees and their dependents.

How is this different from a traditional fully-insured plan?

A fully-insured health plan is the more traditional way to structure an employer-sponsored health plan. With a fully-insured plan, the employer pays a premium to the insurance carrier –the premium rates are fixed for a year, based on the number of employees enrolled in the plan each month.

The monthly premium only changes during the year if the number of enrolled employees in the plan changes. The insurance carrier collects the premiums and pays the health care claims based on the coverage benefits provided by the policy. The covered employees and dependents are responsible to pay any deductible amounts or co-payments required for covered services under the policy.

Want a More In-Depth Exploration?

Like most, we know you’re looking for ways to save money on your health care costs. To help you decide if self-funding is the right choice for you, we will be blogging about self-insured health plans over the next few weeks.

Today, we looked at a general understanding of self-funding compared to a traditional fully-insured health plan. Next week and beyond, we will take an in-depth exploration into the other important elements of self-funding: What are the benefits of self-funded health plans? What are the pitfalls of self-funded health plans? Can self-insured employers protect themselves against unpredicted or catastrophic claims? What laws must self-insured group health plans comply?

Interested in a more intensive training seminar on self-funding?

HAWK Advisers is hosting a seminar in June where David Smith, Vice President of Risk Management and Compliance of EbenConcepts, will discuss all things self-funding. Register here – seats fill quickly, so be sure to grab yours today!