With the cost of health insurance rising, many employers are turning to self-funded insurance plans to try to save money. Self-funded insurance, also known as self-insured health plans, is a type of health insurance plan in which employers cover the costs of their employees’ health care claims rather than purchasing a health insurance policy from an insurance company. In a self-funded insurance plan, employers pay the health care expenses of their employees as they arise, rather than paying premiums to an insurance company.
How Self-Funded Insurance Works
The employer sets aside money to cover the cost of employee health care claims. The employer pays the claims directly, instead of paying premiums to an insurance company. Employers may also set up a third-party administrator (TPA) to manage the claims process and to negotiate discounts with providers. The employer typically establishes a stop loss insurance policy to protect itself from large, unexpected claims.
Self-funded insurance plans are regulated by the Employee Retirement Income Security Act (ERISA). This federal law sets rules for how employers must administer their self-funded insurance plans. It also requires employers to provide certain disclosures to their employees regarding the plan’s benefits and coverage.
Advantages of Self-Funded Insurance
Self-funded insurance plans can offer employers greater flexibility and control over the design of their health care plans. Employers can customize their plan designs to better meet the needs of their employees. Employers can also benefit from lower administrative costs since they are not paying premiums to an insurance company.
Self-funded plans can also help employers save money since they are not subject to the same taxes and fees that are imposed on fully-insured plans. Employers can also better manage their health care costs since they can take advantage of discounts from providers that are not available to fully-insured plans.
Disadvantages of Self-Funded Insurance
The biggest disadvantage of self-funded insurance plans is the risk of large, unexpected claims. Employers are responsible for all of the costs of their employee’s health care claims and they may not have the resources to pay for large, unexpected claims. Employers can mitigate this risk by purchasing stop loss insurance.
Self-funded plans are also subject to more stringent regulations than fully-insured plans. Employers must adhere to federal and state laws regarding the administration of self-funded plans, and they must provide certain disclosures to their employees.
Self-funded insurance plans can be an attractive option for employers who are looking for more flexibility and control over their health care plans. However, self-funded plans come with greater risks and more stringent regulations than fully-insured plans. Employers should carefully consider the pros and cons of self-funded insurance before making a decision.