Self-funded insurance is a compensation plan in which an employer chooses to provide health, disability and/or worker’s compensation insurance benefits to employees itself, with claims to be paid from its own coffers, rather than pay premiums and file claims through a typical insurance provider (called a “fully insured plan”). Self-funded insurance is also called a self-insured plan.
Who Provides Self-Funded Insurance?
Small and large businesses alike can choose to self-insure. Self-funding works best for businesses that have a cash flow that allows them to pay claims as they are received, which means most self-insured employers are large companies. An estimated 86 percent of companies with 5,000 or more employees offer self-funded insurance benefits. According to the Self-Insurance Institute of America Inc., about 75 million employees are covered by a self-funded employer insurance plan.
Benefits of Employer Self-Funding
Benefits for employers who self-insure include:
Regulation by only the federal government, enabling employers, especially those doing business in multiple states, to avoid states’ inconsistent laws and policies
Ability to customize benefits according to the needs of employees
Ability to focus on specific employee health problem trends (such as obesity and smoking) and to devise appropriate employee-wellness programs
Improved cash flow, because the employer can manage its own insurance funds—including those from employee health insurance payroll deductions— to maximize interest income from investments during the life of the plan
The federal employer income tax exclusion for employee health insurance costs
Features of Self-Funded Plans
Self-insured employers are required to comply with certain federal regulations, including the Employee Retirement Income Security Act of 1974 (ERISA), Health Insurance Portability and Accountability Act (HIPAA), Consolidated Omnibus Budget Reconciliation Act (COBRA), the Americans with Disabilities Act and the Civil Rights Act.
Self-insured employers take on all obligations regarding payment of claims. Those that may not be able to meet such obligations can buy stop-loss insurance to mitigate the financial risk beyond a maximum limit set by the employer. Stop-loss insurance can be purchased on a specific claim- or aggregate-claims basis. In other words, the employer can protect itself from a single catastrophic claim or from a too-high accumulation of normal claims.
Employers can administer their insurance plans internally or they can hire a third-party administrator, or TPA, which is sometimes an insurance company providing assistance only.
Under self-funded plans, the employer decides what benefits are offered, determines whether claims are appropriate, and processes and pays claims. Claim payment comes directly from the employer, regardless of whether it has hired a TPA that happens to be an insurance company. Employees are not insured by a TPA.
The names of both the employer and the TPA appear on the benefits handbook and claim forms. However, an insurance company serving in the capacity of a TPA does not make or countermand the self-insured employer’s claims or benefits decisions.
Stop-loss insurance is an agreement between the insurance company and the employer only. It does not involve insured employees.
Payroll deductions are used to fund the self-insured plan, similar to conventional insurance coverage.
Businesses considering a self-funded insurance plan should consider the following:
The costs of adding personnel or hiring a TPA to administer the program
Their claims history, to discern any trends
The cost of stop-loss insurance
Their cash flow