Employers looking to offer healthcare benefits generally have one of two options: fully insured health plans or self-funded plans. A fully insured plan is what most of us are familiar with. Employers and their workers pay health insurance premiums to a carrier that covers all claims. A self-funded plan is slightly different.
Self-funded plans can be administered by insurance careers or third-party intermediaries like StarMed Benefits. Regardless of who performs the administrative function, StarMed says there are six key characteristics that makes self-funded plans different:
1. Monthly Cost Calculations
Employees covered by self-funded plans pay monthly subscription fees by way of payroll inductions, just as if they were purchasing traditional health insurance. The main difference is that their monthly costs are calculated based on the total claims the employer expects to pay during that year. By contrast, insurance premium calculations are based on a combination of expected costs over a much larger pool and the insurance carrier’s profit.
2. Reliance on Stop Loss Insurance
Most self-funded plans are secured by stop loss insurance. This is an insurance policy that exists to make up the difference if the number of claims in a given year exceed the total amount collected. Stop loss insurance adds to the cost for both employer and employee, but the extra amount is negligible.
3. End-of-the-Year Refunds
Self-funded health plans tend to be structured with provisions that allow for end-of-the-year refunds if total claims are less than the amount collected. How much of a refund depends on the arrangement between the employer and its administrator. A typical scenario splits the excess between the two parties.
It goes without saying that the possibility of getting a refund at the end of the year is strong motivation to keep costs in check. Employers could encourage their workers to be more mindful about healthcare spending by offering to kick back a portion of any refund through lower contributions the following year.
4. Fewer Tax Obligations
Next up, self-funded health plans are generally not subject to state taxes. Why? States have jurisdiction over their respective insurance industries. They tax insurance policies accordingly. But self-funded plans are under the jurisdiction of the federal government. Therefore, they are not subject to state taxes and fees.
Not having to pay taxes on their insurance plans leaves employers with more money to put into the plans themselves. This lowers the cost for employees. It is a win-win for both employers and workers.
5. Fewer State and Federal Regulations
Just as with taxes, self-funded health plans are subject to fewer state and federal regulations. The reason for this is the simple fact that self-funded plans are not, by the letter of the law, insurance. Therefore, they are not regulated as such. Many of the rules that apply to health insurance companies do not apply to self-funded plans.
6. More Flexibility in Coverage Options
Thanks to multiple pieces of federal legislation passed since the 1970s, health insurance plans in the 2020s are extremely rigid. That is why you sometimes hear stories of people upset that they need to pay for insurance coverage they will never need. Insurance carriers do not have enough flexibility to tailor policies to each subscriber.
Self-funded plans are a lot more flexible. They aren’t necessarily tailored to individual subscribers, but employers can customize their plans to meet most of the needs of most employees. They do not have to provide coverage their employees don’t want.
Self-funding is definitely an option for businesses of all sizes. It is not insurance, nor is it intended to be. Self-funding is an entirely different way to meet healthcare expenses.
