What is the difference between fully insured and self-funded health plans?

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.

As healthcare costs continue to rise, it’s important to credibly and objectively evaluate the benefits of each plan structure within a company’s operations. While cost savings are usually at the forefront of a plan sponsor’s mind, each plan structure comes with a host of benefits and detriments that can make a significant impact on their business.

Self-Funded vs. Fully Insured: Pros and Cons

Fully Insured Plan Pros

  • Simplicity. With a fully insured plan, employers simply pay a monthly premium to one insurance carrier. All plan administration, claims processing, and other components of managing the health plan are handled by the carrier.
  • No risk. The premium paid to the carrier is fixed throughout the year, which makes budgeting easier for the plan sponsor. There is no risk of the cost changing throughout the year. Many plan sponsors appreciate the peace of mind associated with not wondering how much healthcare their group will need during the year.

Fully Insured Plan Cons

  • Higher costs. The fully insured health plan is typically the most expensive option. Health insurance carriers are required to abide by federal and state regulations for fully insured plans, so their coverage must be more extensive.
  • No customization. Since fully insured plans are one-size-fits-all, there is no flexibility around the various plan components. In contrast, a self-funded plan sponsor can customize their plan (plan design, reference-based pricing/network discounts, stop loss insurance) and choose different providers for plan services (TPA, medical management, PBM, etc.) to save money and maintain a level of insurance coverage that works for their group.
  • Lack of transparency. The group’s claims history may be difficult to obtain with a fully insured plan. Even if the claims history is available, it frequently lacks useful detail. This makes it difficult to identify utilization, high claims costs, and areas for the group to reduce their overall spend. It also leaves the group vulnerable to unidentified costs that lack justification, or what we call “smoke and mirrors.” Without access to the plan details or tools to underwrite a group’s premium independently, it can be difficult to negotiate with a carrier and ensure a fair premium rate.
  • No opportunity for savings. Even if the group spends less than expected, those cost savings don’t come back to the employer. If the group is exceptionally healthy, stays on top of their preventive care, and utilizes their plan as effectively as possible, the final cost of the fully insured health plan for the plan sponsor is exactly the same as if the group has a year with many high claims costs and poor utilization.

Self-Funded Plan Pros

  • Control over plan costs. The plan sponsor can decide what benefits are covered, how to allocate employee cost share, what plan network to use and what network pricing to employ (may include reference-based pricing), and what the overall plan design looks like. The plan sponsor can also adjust variables outside the overall plan design such as what TPA or stop loss carrier they work with. This can result in significant savings.
  • Flexible capital. The plan sponsor only has to pay for the claims costs that occur. If the claims costs are lower than expected, the sponsor can reinvest their savings in their business.
  • Access to data. A self-funded plan allows the plan sponsor to view claims history and plan utilization. This can help them budget better, adjust the plan design as needed, promote more effective utilization, and plan for the future.
  • Fewer regulations. Self-funded plans are not subject to the same state insurance laws or taxes as fully-insured plans.
  • Controllable risk. A plan’s stop loss insurance protects the plan sponsor from exceptionally high claims costs through a specific deductible (protection against one very high claimant) and/or an aggregate deductible (protection against high overall claims costs). The plan sponsor can choose what level of risk they are comfortable with by deciding when the stop loss insurance will be applied.

Self-Funded Plan Cons

  • Less predictable. While there are ways to project plan costs, the self-funded plan is still more variable in cost than a fully insured plan. Except for very large groups, normal variation year to year can be significant. For employer groups with a tight budget or low flexibility, the self-funded plan is likely not the right choice.
  • More complicated. A self-funded plan requires coordinating many relationships and services: a TPA, a stop loss carrier, a benefits plan advisor, and any other service providers that work with the group’s plan. While this can be seamless and offer more flexibility, sometimes it can create more hassle by requiring additional oversight instead of simply paying a monthly premium to one entity.
  • Potential for high costs. In a self-funded plan, the plan sponsor is legally required to pay for all claims costs incurred by the group. The stop loss policy usually protects against high claims costs. However, stop loss policies can have exclusions to limit coverage for certain conditions or services, or for known risks in the population. If the plan sponsor is not aware of these exclusions and allows these prohibited services in their plan, they could be responsible for astronomically high claims costs even with stop loss insurance in place. (benefitspro.com)
  • Still subject to some regulations. Though self-funded plans are free from the intensive scrutiny of state insurance laws and taxes that apply to fully insured plans, plan sponsors are still bound by the rules laid forth by the Employee Retirement Income Security Act of 1974 (ERISA), which dictates the standards for all employee benefit plans. Federally-mandated health benefits still must be provided by the plan and the plan sponsor must ensure that all plan expenses are reasonable or face repercussions (benefitspro.com). Though there are fewer regulations on a self-funded plan than a fully insured plan, the plan sponsor should still be aware of these requirements and not expect that the plans are free from scrutiny.

As you can see, each plan structure has a complex set of pros and cons. While a fully insured plan may make sense for a group that favors predictable budgeting and low involvement, a self-funded plan might be the best choice for a group that seeks greater control and more flexibility in their spending/saving. Being able to objectively evaluate each plan structure and credibly project the outcomes, both reward and risk, is essential to making the right decision for a plan sponsor’s business needs.

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