What Is Self Funded Insurance?
Self funded healthcare is a type of insurance policy in which employers customize and distribute employee benefits directly, bypassing premium payments to an insurance carrier. While self funded insurance comes with some inherent risks, it often proves a more affordable and flexible alternative to traditional group coverage.
Traditional group healthcare reimburses medical claims by drawing from a pool of combined premiums paid monthly by many different businesses. With self funded plans, companies strategically invest in and personally pay doctors’ bills from an in house savings account, warranting lower out-of-pocket fees for employees and employers alike.
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The Growing Cost of Group Healthcare
The average cost of group health coverage rose 6.5% in 2023, edging close to $13,800 per employee. Businesses increasingly face the difficult decision of either absorbing these costs head-on or selecting policies with higher premiums and deductibles, potentially impacting their personnel’s financial stability and morale.
These rate hikes follow a decades-long trend that has led to more and more companies converting to self-funded health insurance. Self funding policies face fewer outside regulations and allow businesses to provide cheaper tailor made health benefits that serve both themselves and their employees. Furthermore, unlike traditional group coverage, companies can reinvest unspent capital in self-funded accounts toward other business needs.
How Does Self-Funded Healthcare Work?
Self-funded insurance allows businesses to provide healthcare to their employees on their own terms, using their own money.
There are no rules or laws that mandate the implementation of self funded healthcare. Therefore, gaining eligibility for this type of plan depends on the employer’s wants and needs.
State governments do not regulate self funded health insurance plans nearly as closely as they do fully insured coverage. However, as with all insurance, self-funding plans must abide by any applicable federal laws. Examples include the Employee Retirement Income Security Act (ERISA), the Affordable Care Act, the Americans with Disabilities Act (ADA), the Civil Rights Act, and the Consolidated Omnibus Reappropriations Act (COBRA).
For a self funded plan to work, companies must have more than enough money to realistically cover all expected employee medical bills. Due to the complications of self-governing insurance, companies interested in self-insurance typically hire a third-party administrator (TPA) to guide them through legal precedents, financial strategy, claims management, and building an appropriate policy.
How Is Self-Funded Healthcare Different?
Conventionally, employers pay monthly premiums into “fully insured” group health insurance policies, passing administrative responsibilities onto that insurer. Whenever employees receive medical care or purchase a prescription within their plan’s healthcare network, the contracted insurance carrier will process and pay eligible claims on the employer’s behalf.
With self funded policies, employers bypass insurance premiums and set aside a monthly allotment to cover expected employee medical expenses. Each company’s TPA can then process and pay employee medical claims directly from these accounts. Unlike fully insured policies, self-insured employers can recoup unused expected funds at the end of each year.
Self-Funded vs. Fully Insured
As with fully insured coverage, benefits offered by self-funded plans vary depending on the policy structure chosen by your employer. At the very least, both types of health insurance must cover emergency services and preventative care. However, most self funded and fully insured plans will also pay for prescription drugs and sessions with a licensed therapist.
Some employers may structure their policies to include dental and vision care or allow employees to buy into higher coverage tiers. Ultimately, benefits offered by both types of group coverage can run the gamut and hinge entirely on how a business wishes to protect its employees.
Non-medical elective surgery
Depends on policy
Depends on policy
Depends on policy
Depends on policy
What Is a Third Party Administrator (TPA)?
Though businesses and associations can autonomously govern their self-funded policies, most opt for the services of a third-party administrator (TPA). TPAs expertly advise these companies and custom-build and manage their group health insurance coverage. Since TPAs typically work for a commercial insurance carrier, employee insurance cards may show that carrier’s name and use their provider network.
As employees incur medical bills, the TPA will process and pay each claim from the company’s designated savings account. TPAs can also handle customer service and draw up monthly claims reports, giving businesses valuable insights to help them adjust coverage details throughout the year.
What Kind of Health Insurance is Self-Funded?
Self funded health insurance is not comparable to other types of coverage. However, one could draw some parallels to a basic HMO plan. HMO policies limit members to a network of doctors and healthcare facilities contractually bound with the insurance provider. Outside of emergencies, HMOs generally will not pay for out-of-network care.
The TPAs who administer self funded policies tend to have professional ties to an outside insurance company. Because of this, self-insured plans often prefer doctors and medical centers within that insurer’s preexisting network. However, unlike one-size-fits-all fully insured plans, businesses practicing self-funded healthcare have the final say on how they will cover out-of-network claims.
Can Self-Funded Insurance Deny Coverage?
As with fully insured policies, self-insured plans can deny coverage for numerous reasons. As mentioned above, some self-funded policies often refuse to pay employee medical bills received from out-of-network doctors or specialists. Employers may also deny coverage if members fail to follow policy rules, like getting preauthorization for a non-emergency diagnostic test.
Claims denials can also occur from questions of medical necessity. For example, suppose you had an accident resulting in facial injuries. If your doctor prescribed a rhinoplasty as crucial in treating your condition and improving your quality of life, most employers would cover the procedure as a medical necessity. However, if you wanted nose surgery for purely aesthetic purposes, your employer would deem this unnecessary and deny coverage.
How Much Does Self-Funded Healthcare Cost?
As with fully-insured healthcare, patient cost sharing for self funded health insurance will vary widely from plan to plan. Member deductibles, copays, coinsurance, and included services depend on how employers customize benefits and where to cut costs. The chart below portrays a loose estimate of what self-insured health plan members might pay out-of-pocket for medical care.
Should You Select Self-Funded Healthcare?
Employers looking to take more control and cut costs on company health coverage should research and consider self-funded medical insurance. Coverage flexibility and a lack of state level oversight can help self insuring employers build policies that meet specific company needs. Self funding also guarantees a partial return of unused expected funds at the end of each year.
In theory, cutting out excess premiums, taxes, and underwriting expenses should result in cheaper comprehensive coverage for employees and employers in tandem. However, self funded insurance also presents unique liabilities. Financially conservative companies may prefer to eat the cost of traditional group coverage and let an outside insurer carry most of the risk.
Choosing to self-fund employee healthcare over conventional group health insurance offers the following benefits:
- Businesses can customize plans to meet company needs and avoid spending money on unnecessary coverage.
- Employers get to keep most unused medical funds and repurpose them into other business interests at the end of the year.
- Expert TPAs will still handle claims processing, plan management, and customer service as requested.
- TPAs can draw up and walk companies through monthly claims reports, giving employers valuable insights on adjusting coverage year-round.
- Self-funded policies must only follow federal regulations, meaning companies can administer these plans unilaterally across state lines.
However, self-funded health insurance policies present many key drawbacks, including:
- Catastrophic medical claims can put employers at risk of severe financial loss.
- Annual healthcare expenses often prove unpredictable and challenging to plan for.
- Self-funding policies make businesses more vulnerable to lawsuits and regulatory fines customarily shouldered by insurance carriers.
- Medical expenses will vary widely depending on your employees’ average age and health status.
- Due to the lack of state-level or ACA regulation, employees have fewer protections against employers who opt into subpar benefits or exploit coverage loopholes.
- Even with TPA assistance, learning to fund and manage healthcare independently has a steep learning curve.
Alternatives To Self-Funded Healthcare
If your employer does not self-fund employee health coverage, you can choose between the following two options.
Traditional Group Health Insurance
While self-funded healthcare policies have become more prevalent, many businesses still utilize standard group health insurance. With fully insured group coverage, employers pay a monthly premium to an insurance company responsible for processing and paying employee medical claims.
Traditional group health insurance makes sense for companies with a thin financial risk margin, as one disastrous claim could quickly capsize a struggling business. Though these plans typically cost more upfront, the overseeing insurance companies hold responsibility for any potential legal or financial complications, protecting business owners and allowing them to focus on work.
Healthcare Marketplace Plans
If you do not agree to the terms of your employer sponsored medical coverage, you may want to consider researching and purchasing an ACA-compliant plan on the healthcare marketplace. The government enacted the Affordable Care Act in 2010 to provide cheaper medical insurance to more Americans, boasting consumer protections and premium subsidies to individuals and families within 100%-400% of the federal poverty level.
ACA-compliant policies must cover preventative care and cancer screenings, provide essential services like emergency surgery and newborn care, insure people with preexisting conditions, and impose zero lifetime or annual coverage limitations. Beneficiaries can select plans between four coverage tiers, allowing them to semi-customize their benefits and the affiliated out-of-pocket expenses.
Putting It All Together
All in all, self funding health insurance offers employers a flexible and often cheaper alternative to fully insured group coverage. By transitioning to a self funded health plan, employers need only save enough money per month to cover expected employee medical expenses. If any of these funds go unused, the company can get most of them back by the end of the year.
Self funded policies can adjust proportionate to a company’s needs and are not subject to the same taxes, fees, and state regulations as traditional employer sponsored coverage. If you are a business owner discouraged by rising group insurance rates, contact a TPA and ask how to begin funding your own custom policy.