By Bill Capece, Director of Business Development, JS Benefits Group
For employers facing rising health insurance costs, self-insured health plans can provide another way to approach healthcare financing.
But self-funding is more than simply changing insurance plans. It changes how an employer assumes risk, pays claims, analyzes healthcare spending and manages its overall benefits strategy.
So, what exactly is a self-insured health plan, how does it work, and how does it compare with fully insured and level-funded coverage?
Watch: What Is a Self-Insured Health Plan?
In this video, Bill Capece, Director of Business Development at JS Benefits Group, explains the fundamentals of self-insured health plans and what employers should understand before considering a change in their health plan funding strategy.
Watch the video:
https://youtu.be/XqC2LGTNM6U
What Is a Self-Insured Health Plan?
A self-insured health plan, also called a self-funded health plan, is a group health plan in which the employer assumes responsibility for paying covered employee healthcare claims rather than transferring that claims risk entirely to an insurance carrier.
Instead of paying an insurance company a fixed premium and having the carrier assume the claims risk, the employer funds eligible claims as they occur.
That doesn’t mean the employer has to manage everything itself.
A self-funded health plan commonly involves several important partners, including:
- Third-party administrator (TPA): Handles claims processing, plan administration and other administrative functions.
- Provider network: Gives employees access to participating doctors, hospitals and healthcare providers.
- Stop-loss insurance: Provides protection against unusually large individual claims or high overall claims.
- Pharmacy benefit manager (PBM): Manages prescription drug benefits and pharmacy claims.
- Benefits consultant or broker: Helps the employer evaluate plan design, funding, risk and overall strategy.
The exact structure varies by plan.
How Does Self-Funding Work?
The easiest way to understand self-funding is to compare it with traditional fully insured coverage.
With a fully insured health plan, the employer pays a premium to an insurance carrier. The carrier assumes the financial risk for covered claims.
With a self-insured health plan, the employer funds covered claims directly while using administrative services, provider networks and stop-loss coverage to help manage the plan.
For example, if an employer has favorable claims experience during a plan year, the employer may retain savings that otherwise would have remained with an insurance carrier under a traditional fully insured arrangement.
On the other hand, higher-than-expected claims can create additional financial exposure.
That’s why the plan’s stop-loss structure, claims history and funding strategy are so important.
Why Do Employers Consider Self-Insured Health Plans?
There isn’t one reason every employer chooses to explore self-funding. The decision typically involves several factors.
Greater Control Over Healthcare Spending
Self-funding can give an employer more direct involvement in how healthcare dollars are spent.
Instead of simply paying a fixed premium, the employer can analyze claims experience and use that information to evaluate plan design and healthcare strategies.
Greater Claims Transparency
Depending on the arrangement and applicable privacy requirements, employers may have access to more detailed information about claims trends than they would receive through a traditional fully insured arrangement.
That information can help identify areas where healthcare spending may be increasing.
Flexibility in Plan Design
Self-funded arrangements can provide employers with additional flexibility when designing their benefits strategy.
Plan design can potentially be structured around the organization’s workforce, financial objectives and long-term benefits strategy.
Opportunity to Retain Favorable Claims Savings
When claims are lower than expected, an employer may benefit financially from favorable claims experience.
However, savings are not guaranteed, and employers must also be prepared for the possibility of higher-than-expected claims.
What Is Stop-Loss Insurance?
Stop-loss insurance is one of the most important components of many self-funded health plans.
It is designed to protect an employer from claims that exceed specified thresholds.
There are two primary types of stop-loss coverage.
Specific Stop-Loss
Specific stop-loss protects the employer against exceptionally high claims from an individual employee or dependent.
For example, a plan might have a specific stop-loss threshold of $100,000. The employer would generally be responsible for eligible claims up to that threshold, with the stop-loss coverage providing protection above the applicable threshold according to the policy terms.
The actual threshold and contract terms vary by plan.
Aggregate Stop-Loss
Aggregate stop-loss protects against unexpectedly high claims for the entire covered population.
Rather than focusing on one individual, aggregate coverage addresses the plan’s overall claims exposure.
Using the appropriate combination of specific and aggregate stop-loss coverage can help an employer manage the financial risk associated with self-funding.
Self-Insured vs. Fully Insured Health Plans
The fundamental difference is who assumes the claims risk.
Fully Insured
The employer pays a premium to an insurance carrier.
The carrier assumes the risk for covered claims, subject to the terms of the insurance policy.
Self-Insured
The employer funds covered claims directly.
The employer typically works with a TPA, provider network and stop-loss carrier to administer and manage the plan.
Neither funding arrangement is automatically appropriate for every employer.
The decision should be based on the employer’s circumstances, including:
- Number of employees and enrolled members
- Claims history
- Workforce demographics
- Current healthcare costs
- Cash-flow considerations
- Risk tolerance
- Stop-loss terms
- Plan design
- Employee contribution strategy
- Long-term benefits objectives
Employers should evaluate the numbers before making a funding change.
How Does a Level-Funded Health Plan Fit In?
For some employers, level-funded health plans can provide another option between traditional fully insured coverage and conventional self-funding.
A level-funded arrangement generally combines several components into a predictable monthly payment, which may include:
- Expected claims funding
- Administrative expenses
- Stop-loss protection
The structure can provide employers with more predictable monthly budgeting while incorporating elements of a self-funded model.
Depending on the specific plan and contract, an employer may also be eligible for a return or credit when claims perform better than expected.
Level-funded plans vary significantly, so employers should review the actual plan structure, contract terms and stop-loss provisions before making a decision.
Learn more about Level-Funded Health Plans.
Self-Funded vs. Level-Funded: What’s the Difference?
The terms can sound similar, but there are important differences.
A traditional self-funded arrangement generally requires the employer to manage more of the claims funding directly.
A level-funded arrangement typically packages expected claims funding, administrative costs and stop-loss protection into a more predictable monthly payment.
For employers considering an alternative to traditional fully insured coverage, both approaches may be worth evaluating.
The right comparison isn’t simply self-funded vs. level-funded.
It should be:
Which funding structure best fits the employer’s claims experience, financial position, workforce and risk tolerance?
What Should Employers Evaluate Before Self-Funding?
Moving to a self-insured health plan should not be based solely on the size of the current insurance premium.
Employers should evaluate:
- Claims experience
What does the organization’s historical claims data show? - Enrollment
How many employees and dependents are covered? - Risk tolerance
How much claims volatility can the employer reasonably absorb? - Stop-loss coverage
What are the specific and aggregate levels, exclusions and contract provisions? - Cash flow
Can the organization comfortably fund claims as they occur? - Plan design
Would changes to deductibles, copays, coinsurance or other plan features improve the overall strategy? - Pharmacy costs
How are prescription drug costs affecting the plan? - Long-term objectives
Is the goal simply to reduce the next year’s premium, or is the employer trying to build a long-term healthcare strategy?
These questions can help employers determine whether self-funding deserves further consideration.
Can Small and Mid-Sized Employers Self-Fund?
Self-funding is not limited exclusively to very large employers.
Advances in plan administration, provider networks, stop-loss products and level-funded arrangements have created additional options for smaller and mid-sized employers.
However, size alone should not determine whether an employer should self-fund.
Claims history, enrollment, demographics, financial resources and risk tolerance all matter.
That is why an employer should evaluate its own data rather than relying solely on a general industry rule.
How a Benefits Consultant Can Help
Changing the funding structure of a health plan is a significant decision.
An experienced employee benefits consultant can help an employer compare:
- Fully insured plans
- Self-funded plans
- Level-funded plans
- Stop-loss options
- Plan designs
- Employer contribution strategies
- Claims experience
- Healthcare cost trends
At JS Benefits Group, we help employers evaluate their healthcare funding options and develop employee benefits strategies designed around their specific circumstances.
Learn more about Self-Insured Health Plans.
You can also explore our broader Employee Benefits Solutions.
The Bottom Line
A self-insured health plan gives an employer a different way to finance and manage employee healthcare.
Instead of transferring all claims risk to an insurance carrier through a traditional premium arrangement, the employer assumes more direct responsibility for healthcare claims while using administrative partners, provider networks and stop-loss insurance to manage the plan.
For some employers, this approach can create greater transparency, flexibility and control over healthcare spending.
But self-funding is not a one-size-fits-all solution.
The most important step is understanding the organization’s actual claims experience, financial position, risk tolerance and long-term benefits objectives before making a change.
The right healthcare funding strategy starts with the data — not simply the renewal rate.
About the Author
Bill Capece
Director of Business Development, JS Benefits Group
Bill Capece works with employers to evaluate employee benefits strategies, healthcare costs and health plan funding options. At JS Benefits Group, he helps employers understand and compare fully insured, self-funded and level-funded health plan strategies.
JS Benefits Group provides employee benefits consulting and healthcare strategy for employers throughout Pennsylvania, New Jersey, Delaware, Maryland, New York and nationwide.
Explore JS Benefits Group:
https://jsbenefitsgroup.com/
This article is provided for general informational purposes and does not constitute insurance, legal or tax advice. Health plan availability, eligibility, rates, benefits, stop-loss provisions and contract terms vary by employer, carrier and plan.
Stop-Loss Insurance Explained: Protecting Your Business in a Self-Funded Plan
Are Self-Funded Health Plans Available for Small Businesses in Newtown?
Self-Insured Health Plans: How They Work and When They Make Sense
