Employee health costs are fluctuating because of continuing uncertainty about healthcare reform and regulatory changes. Some employers try to contain expenses by paying employee health claims directly instead of buying fully insured policies.
Joseph Berardo, Jr., CEO of MagnaCare, has said that employers who self-fund can see total savings in the range of 10% to 20% when compared with fully insured arrangements, depending on plan design and stop-loss protection.
When employers consider a self-funded plan, they should weigh the potential for lower monthly costs against the financial risk of covering employees' claims. The right choice depends on the employee demographics, the company’s cash flow, and tolerance for risk from serious illnesses or accidents.
The Benefits of Self-Funded Plans
- Quality of data. Employers get detailed access to employee health-claims data and demographics, allowing analysis focused on the covered population rather than broad, generalized data.
- Customized plans. Employers control covered benefits, exclusions, eligibility, employee cost sharing, retiree benefits, and policy limits without being bound by many state insurance mandates.
- Control of cash. Because coverage isn’t fully prepaid, employers can retain interest and investment income and delay certain payments until services are billed; lower claims mean the employer, not an insurer, keeps the savings.
- Lower employee premiums. Self-funded arrangements can produce lower premiums for employees on single and family plans compared with fully insured plans.
- ERISA preemption. Self-funded plans are generally governed by federal ERISA rules rather than state insurance laws, which affects reserve requirements, premium taxes, and mandated benefits; employers must still comply with federal employment and privacy laws such as ADA and HIPAA.
- ADA
- U.S. Tax Code
- Health Insurance Portability & Accountability Act
- Newborns' & Mothers' Health Protection Act
- Pregnancy Discrimination Act
- Mental Health Parity Act
- Women's Health & Cancer Rights Act
Lower employee premiums and flexible plan design can help employers recruit and retain staff; see Attracting Leadership Talent Through Competitive Benefits for more on benefits and talent attraction.
The Cons of Self-Funded Employee Plans
- Financial risk. Smaller groups face higher variability and the chance of expensive claims; many employers buy stop-loss coverage to limit exposure above a specified dollar level.
- Administrative risks. Employers are fiduciaries of the plan and must administer it correctly, protect private claims information, and meet federal reporting requirements.
- Administrative costs. Employers can administer claims in-house or hire a third-party administrator (TPA); TPAs and utilization review services add cost.
- Economic sensitivity. It can take several years to realize the benefits of self-funding, which may be difficult during periods of economic weakness.
Carefully weigh these benefits and drawbacks before changing your plan. If analyzing the financial impact is complex, consider consulting a specialist or reliable resources on plan evaluation.
For practical guidance when evaluating a move to self-funding, see Evaluating Employee Health Insurance Benefits for tools and considerations to help with the decision.
If you prefer personal advice, review your options or talk to an agent to discuss plan design and stop-loss choices.
Frequently Asked Questions
What is a self-funded health plan?
A self-funded plan is one where the employer pays employee medical claims directly instead of buying a fully insured policy from an insurer.
How does stop-loss insurance work?
Stop-loss insurance reimburses the employer for claims that exceed a specified individual or aggregate dollar amount, limiting catastrophic exposure.
Are self-funded plans legal everywhere?
Self-funded plans are generally governed by federal ERISA rules and are not subject to many state insurance mandates, but employers must still follow federal employment and privacy laws.
Do small employers benefit from self-funding?
Smaller employers can benefit from lower costs and customization, but they face greater financial variability and often rely on stop-loss coverage to manage risk.