Self Funded Insurance vs Fully Insured

Healthcare costs continue to skyrocket, and many employers are searching for ways to control costs while keeping benefits affordable and attractive to employees. For some employers, a self-funded health plan can be an effective strategy for lowering costs. Many employers have adopted these plans in recent years. According to a 2020 Kaiser Family Foundation Employer Health Benefits Survey, 67% of employees who receive employer-sponsored health coverage obtain it from self-funded health plans, which is a 23% increase since 1999.

Changing from a fully insured to a self funded health plan is a big decision for any organization that often comes with wide-ranging impacts. While transitioning to a self-funded health plan can present opportunities for employers of all sizes, it’s important that employers understand what to expect when implementing this type of health plan.

This blog provides a general overview of the benefits, risks, and differences between self funded insurance vs fully insured.

The Main Differences Between Self Funded Insurance vs Fully Insured

With a self-funded health plan, the employer assumes the financial risks associated with providing health care benefits to its employees. Instead of paying a fixed premium to an insurer (like in a fully insured health plan), the employer collects premiums from enrollees and pays its employees and their dependents’ medical claims out of pocket as they’re incurred. Employers can administer their health plans themselves or contract with organizations that are third-party administrators (TPAs).

Let's take a closer look at self-funded vs Fully insured health plans as it pertains to risk, plan architecture, and payment structure.

• Risk

Fully insured -  The carrier ultimately holds the risk in a given year. That means whether claims are good or bad they are taking that on and the employer pays the same amount every month. 

VS.

Self funded - the employer is taking on the majority of the risk. They are now paying for claims as they come in. And if those claims are good, they pay less. If those claims are not as good, they pay a little bit more.

• Plan Architecture

Fully insured - The insurance carrier ultimately controls the entire plan architecture. That one insurance carrier is the same for medical claims, prescription drug claims, handling the customer service, and they even dictate what the designs of the plan are.

VS.

Self funded - The employer controls the plan architecture. Which means they can still have everything be one carrier but they now have the ultimate control to include multiple parties. The employer may choose somebody different for prescription drug program than their medical plan. In addition they also control the plan designs. So employers in a self funded environment set their own deductibles, co-pays, and out of pocket maximums. 

• Payment Structure

Fully insured - there’s a flat monthly premium that only fluctuates based on headcount or family size. 

VS.

Self Funded - there’s 3 main components:

1. Administrative costs - this is a fixed amount every month.
2. Stop loss coverage - think of this like a fully insured policy for large claims. Stop loss insurance is also a fixed amount every month. 
3. Claims - this is the biggest component of self funding. The claims are typically paid on a weekly basis by employers and this is the variable amount. 
   
   

The Benefits of Self-Funded Health Plans vs Fully Insured

There's several reasons why an employer may choose to move from a fully insured to a self-funded health plan, including:

• Reduced costs - Self-funded health plans often eliminate unnecessary expenses, including state-levied premium taxes. At the end of the plan year, if the claims employers pay are less than the contributions, employers keep the surplus funds. This money can be used to do things like reduce future contribution rates or increase benefits coverage for employees.
  
  
• Increased flexibility - Self-funded health plans often offer employers more flexibility than fully insured health plans. This is because they don’t have to comply with many burdensome and often conflicting state health insurance regulations and benefits mandates. Self-funded health plans also allow employers to customize their health plans to meet their employees’ needs and better manage healthcare costs while still benefiting from a large provider network. Additionally, since employers with self funded health plans pay claims as they occur, they may have increased cash flow.
  
  
• Enhanced claims management - Self-funded health plans permit increased transparency. Employers can access and review utilization and claims data, allowing them to manage their employees’ health claims directly instead of relying on others, thus reducing administrative costs. Furthermore, employers can use this data to adjust their plans’ coverage each year to better meet their employees’ needs.

Despite the potential benefits, self-funded health plans can also present significant financial risks when claims exceed employers’ cash reserves. Many organizations mitigate this risk by purchasing stop-loss insurance, which limits the amount claims employers pay each year.

Considerations Before Moving From a Fully Insured to a Self Funded Health Plan

Altering health plans may present challenges that must be addressed. Before transitioning from a fully insured to a self funded health plan, employers should evaluate the following considerations:

• Managing Cash Flow - Often, the biggest difference employers experience when moving from a fully insured health plan to self-funded is cash flow management. Employers must create a budget to manage costs and pay medical claims on time. Self-funded health plans are often a good option for employers with strong cash flow or reserves.
  
  
• Containing Costs and Mitigating Risks - Since employers are responsible for paying health claims as they’re incurred with self-funded health plans, they must implement strategies to contain costs and mitigate risks. Regularly reviewing financial and claims data can provide employers with important insights into managing the costs of claims and mitigating risks effectively.
  
• Evaluating Workforce Size and Demographics - Catastrophic claims can drain an employer’s cash reserves that are meant to cover all the plan’s claims for an entire year, jeopardizing the plan’s long-term viability. Therefore, evaluating workforce size and demographic data before switching to a self-funded health plan is critical. Older employees usually have more health needs, resulting in more claims. Additionally, employees with chronic illnesses tend to have greater claim frequency, increasing employers’ risk of high losses. Evaluating the organization is crucial to help understand an employer’s risks of moving to a self-funded plan.
  
  
• Determining Employee Contributions - With self-funded health plans, employers decide how much employees must pay in premiums to be covered by the plan. If employers fail to receive sufficient funds through premiums, they may not be able to adequately cover claims. To calculate employee premiums and forecast claims, many employers with self-funded health plans use fully insured premium equivalents to develop their health plan budgets. Establishing a health plan budget allows employers to calculate the necessary premiums to cover anticipated claims.
  
  
• Utilizing Health Care Claims Data - Gaining access to employee health claims data is one of the biggest advantages of moving from a fully insured health plan to a self-funded health plan. With a self funded plan, employers can typically access financial and clinical data, which provides information about the cost and nature of their employees’ claims, such as diagnoses. This data enables employers to better control their health care costs.
  
  

Preparing to Switch From Fully Insured to a Self Funded Health Plan

Transitioning from a fully insured to a self funded health plan can be a long process. Employers should consider these strategies when preparing to move to a self-funded health plan:

• Create a transition plan and establish a timeline
• Consider partnering with a TPA to help design the health plan and choose the provider network
• Evaluate stop-loss insurance to help mitigate risks
• Decide on the plan’s policies and coverage
• Ensure the plan complies with applicable legal requirements
• Train benefits managers and other personnel on self-funded health plans
• Educate employees on the plan’s benefits

An effective strategy can help employers to transition from fully insured to self insured smoothly and avoid unnecessary challenges and delays.

In summary, self funded health plans operate much differently than fully insured health plans. It's highly recommended to work with a self funded health plan expert so employers can make a successful transition. 

Sources: Mike Kroupa & Zywave

Mike Kroupa
Self-Funded Group Health Plan Consultant
Connor & Gallagher OneSource (CGO)

Mike Kroupa has consulted on over 250 self-funded health plans over his 15-year career in the group health insurance industry. Mike started his career as an actuary at Mercer where he spent 5 years specializing in large, multi-site employers. Prior to joining Connor & Gallagher OneSource (CGO), Mike spent 10 years at HUB International where he led their data analytics team of 20 people and over 180 self-funded clients. Mike's passion is to help employers remodel their health plans to build health plans employees love at an affordable price.