Self-Funded Insurance: Pros and Cons

Female patient getting serious diagnosis

While fairly popular among large employers, self-funded insurance hasn’t been prevalent among smaller companies.

However, the Affordable Care Act could change all that as some stipulations of Obamacare have smaller companies taking a second look at self insurance. Self-funded plans are not subject to the ACA’s mandatory mental health and maternity care. Also, self-insured employers avoid the mandated tax on health insurers – estimated to increase insurance costs 2 to 3 percent each year.

How It Works

In self-funded insurance plans – the employer, not an insurance company, takes on the risk for paying out the health care claims. This means that the employer must have the cash flow to meet the healthcare needs of its employees or take advantage of stop-loss insurance.

If, God-forbid, an employee in a self-funded plan develops cancer or another potentially costly condition – the employer would be on the hook to provide funds for treatment. To prevent catastrophic losses due to insurance claims, most self-funded plans include stop-loss insurance – which caps off based on expected claims.

Lauren Stoddard, a product manager for Cigna, told Employee Benefit Advisor that most employers cap their exposure at 120 percent of expected claims.

“We can go as high as 150 percent,” she said, adding that few smaller employers do. Most limit their individual employee claim exposure in the $20,000-$30,000 range, she said.

If an employer does decide to go with a self-funded plan, the company can administer the plan itself or subcontract the responsibility to a third party administrator (TPA). TPA services can include arranging provider network contracts and stop-loss insurance.

Under a self-funded system, employees contributions for their coverage are still taken care of via the employer's payroll department. However, instead of payments being sent to an insurance company, contributions are either held until claims become due and payable; or reserved in a tax-free trust that is run by the employer.

Benefits of a Self-Funded Plan

In addition to avoiding federal mandates, self-funded plans also provide HIPAA-compliant, yet more-detailed claims data. This data can be leverage to tailor programs appropriately to meet employees’ needs, as opposed to a one-size-fits-all policy. A tailored plan could be used to hire and retain ideal workers and could always be adjusted – including negotiating contracts with the providers or provider network to meet needs of those being covered.

Self-Funded Plans - A New Strategy for Obamacare

Self-Funded plans, usually used only by large corporations, are now beginning to make more sense for small employers. With stop-loss insurance. the exposure for a small business is minimized yet the savings can be realized to the business and its employees over time. Self-Funded plan might be the strategy that best fits you.

Health-Life-Dental-Insurance is well-equipped to help employers make the essential decisions surrounding whether or not to go with a self-funded plan. We have agents who have been serving businesses since 1989 ready to help you save money and provide greater benefits to your employees. Visit our website or call us at 1-800-257-1723.