How do self-funded health plans work?
The self-insured plan sponsor directly pays for claims as they occur. This is often done through a designated fund for healthcare costs. Most plan sponsors will incorporate stop loss insurance to protect themselves from large claims and work with a third-party administrator (TPA) or insurance company to handle claims administration. They also determine all components of the health plan such as the plan design (employee cost share, plan network, network pricing) and what benefits are covered. Sponsors may also choose to incorporate additional components and services including pharmacy benefit management (PBM), employee wellness programs, benefits dashboards, and other programs to make their self-funded plan their own and provide added benefits.
Employee benefits plans can be broken out into two structures: the traditional fully insured plan or the self-funded plan. In a fully insured plan, a group purchases insurance by paying a premium to an insurance carrier. The carrier then covers all claims incurred by the plan members. In a self-insured (also known as self-funded) plan, employers pay for the claims themselves. They usually work with a third-party administrator (TPA) to process claims and often incorporate stop loss insurance to protect themselves from large claims. They may also add additional services to promote employee well-being, manage pharmacy benefits, or otherwise improve upon the components of their benefits plan. Another option not covered here is a level-funded plan. Read our blog post on level-funded pros and cons to understand this self-funded plan design that feels similar to a fully insured plan for many plan sponsors.
Level-funded plans have been rising in popularity in the past few years. According to The Kaiser Family Foundation’s 2021 Employer Health Benefits Survey, the percentage of small firms that report having a level-funded plan has been steadily increasing since 2019.
Level-funded plans are attractive to many employer groups because they strike a balance between the risky but rewarding self-insured plan and the steady but pricey fully-insured health plan.