Self Funding vs. Fully Insured: A Comprehensive Comparison

Deciding Between Self Funding and Fully Insured Health Plans

Self funding vs fully insured: This is a crucial decision many small and medium-sized business owners face when looking for affordable, flexible health insurance solutions.

Here’s a quick comparison to get you started:

1. Self Funding:
2. Employers pay for health claims as they occur.
3. More control over plan design.
4. Potential for cost savings.
5. Financial risk due to variable monthly costs.
6. Requires stop-loss insurance for large claims protection.
7. Fully Insured:
8. Employers pay a fixed premium to the insurance carrier.
9. Predictable, less risky financial structure.
10. Higher costs with limited plan customization.
11. Insurance company handles the administration and claims.

Rising medical costs and the need to offer competitive benefits are forcing employers to explore different health insurance options. At NPA Benefits, we help you navigate the complexities of self funding vs fully insured plans, providing tailored solutions to meet your business needs.

I’m Les Perlson, and I’ve spent over 40 years in the health insurance marketplace, specializing in employee benefits design and insurance options. Ready to find out which solution is right for you? Read on, or contact us for personalized advice.

What is Self Funding?

Self funding is a health insurance approach where employers pay for their employees’ medical claims directly, rather than paying fixed premiums to an insurance carrier. This method offers a range of benefits and risks that employers should carefully consider.

Benefits of Self Funding

Cost Savings

One of the main advantages of self funding is the potential for significant cost savings. Unlike fully insured plans, where premiums are fixed and often inflated to cover worst-case scenarios, self-funded plans only pay for actual medical claims. If your employees are generally healthy, this can lead to substantial savings. In fact, during the COVID-19 pandemic, many self-funded employers saw their healthcare costs drop due to reduced use of non-COVID healthcare services.

Flexibility

Self-funded plans offer unparalleled flexibility. You can customize the plan to meet the specific needs of your workforce. For example, a tech startup with younger employees might prioritize mental health services, while a manufacturing firm might focus on occupational therapy. This level of customization is rarely possible with fully insured plans.

Control Over Plan Design

With self funding, you have more control over the design of your health plan. You can choose the services and providers that best suit your employees’ needs, whether it’s mental health counseling or specialized care centers. This control allows you to create a more tailored and effective benefits package.

Lower Taxes

Self-funded plans are exempt from many of the taxes associated with traditional health insurance, such as state premium taxes. This can further reduce your overall healthcare costs.

Compliance with ERISA

Self-funded plans are governed by the Employee Retirement Income Security Act (ERISA), which preempts state legislation. This means you only have to comply with federal regulations, simplifying the compliance process.

Risks of Self Funding

Financial Risk

The most significant risk of self funding is the financial burden of large claims. For example, cancer treatments can easily exceed $200,000 in the first year alone. To mitigate this risk, most employers purchase stop-loss insurance, which covers claims that exceed a certain amount.

Administrative Burden

Managing a self-funded plan requires handling various administrative tasks, from claims processing to regulatory compliance. This can be a significant burden, especially for smaller companies. Many employers opt to work with a Third-Party Administrator (TPA) to manage these tasks.

Variable Monthly Costs

Unlike fully insured plans with fixed premiums, the costs of self-funded plans can vary month to month. This variability can make budgeting more challenging. However, strategies like stop-loss insurance can help manage these fluctuations.

Need for Stop-Loss Insurance

Stop-loss insurance is essential for managing the financial risks associated with self funding. There are two types: individual stop-loss, which covers claims that exceed a certain amount per individual, and aggregate stop-loss, which covers total claims that exceed a specified limit for the entire group. While stop-loss insurance adds to the overall cost, it provides crucial financial protection.

In the next section, we’ll explore fully insured plans, which offer a different set of benefits and challenges. Stay tuned to find out which option might be the best fit for your organization.

What is Fully Insured?

When it comes to fully insured health plans, the employer pays a fixed monthly premium to an insurance carrier. This premium covers all the medical expenses of the employees enrolled in the plan. It’s a more traditional approach and offers a different set of benefits and challenges compared to self-funding.

Benefits of Fully Insured

Financial Predictability

Fully insured plans provide financial predictability. You pay a fixed premium each month, which makes budgeting straightforward. This is especially beneficial for smaller companies that need to manage their cash flow carefully.

Less Financial Risk

In a fully insured plan, the insurance carrier bears the financial risk. This means that if your employees have high medical claims, the insurance company covers those costs. For employers, this translates to less financial risk.

Fewer Administrative Duties

With fully insured plans, the insurance company handles most of the administrative tasks. This includes processing claims, managing compliance with state regulations, and selecting vendors. This setup means fewer administrative duties for the employer, allowing them to focus more on their core business activities.

Compliance with State Regulations

Fully insured plans are subject to state regulations, which can be both a benefit and a drawback. On the positive side, these regulations ensure that the plans meet certain standards of coverage and fairness.

Drawbacks of Fully Insured

Higher Costs

One of the significant drawbacks of fully insured plans is the higher costs. The fixed premiums include administrative fees, taxes, and the risk assumed by the insurance company. Over time, these premiums can add up, especially if your company has a good safety record and low claims.

Less Flexibility

Fully insured plans are generally less flexible. The insurance carrier offers pre-designed plans that may not fully meet the unique needs of your employees. This lack of customization can result in paying for unnecessary coverage or not having enough coverage for specific needs.

No Refunds for Unused Premiums

In a fully insured plan, any unused premiums are not refunded to the employer. The insurance company keeps the surplus, which means that if your employees have fewer claims than expected, you won’t see any financial benefit from that.

State Taxes and Regulations

While compliance with state regulations ensures certain standards, it also means that fully insured plans are subject to state taxes and regulations. These can add to the overall cost and complexity of the plan.

In the next section, we’ll delve into the key differences between self-funding and fully insured plans, helping you determine which option might be best for your organization.

Self Funding vs. Fully Insured: Key Differences

When deciding between self funding vs. fully insured plans, you’ll notice several key differences that impact cost, risk, and administrative responsibilities.

Cost Comparison

Premium Costs

• Fully Insured: Employers pay a fixed premium to an insurance carrier. This ensures financial predictability but can be more expensive over time.
• Self-Funded: Employers pay claims out-of-pocket as they occur. This can lead to potential savings if claims are lower than expected, but costs can vary month to month.

Potential Savings

• Fully Insured: No potential for refunds on unused premiums. Insurance companies keep any surplus.
• Self-Funded: If claims are lower than anticipated, the employer keeps the surplus, leading to potential cost savings.

Tax Implications

• Fully Insured: Subject to state taxes on premiums.
• Self-Funded: Exempt from state taxes, leading to lower overall costs.

Stop-Loss Insurance Costs

• Self-Funded: Employers often purchase stop-loss insurance to protect against high claims. This adds an additional cost but provides financial security.

Administrative Responsibilities

TPA Role

• Fully Insured: The insurance carrier handles all administrative tasks, including claims processing and compliance.
• Self-Funded: Employers often hire a Third-Party Administrator (TPA) to manage claims and other administrative duties. This can be an additional cost but offers more control over the process.

Claims Processing

• Fully Insured: The insurance carrier processes all claims, reducing the administrative burden on the employer.
• Self-Funded: The TPA processes claims, but the employer retains ultimate responsibility for paying them.

Compliance Requirements

• Fully Insured: Must comply with state regulations and taxes.
• Self-Funded: Generally exempt from state regulations due to the Employee Retirement Income Security Act (ERISA), simplifying compliance but requiring adherence to federal rules.

Administrative Costs

• Fully Insured: Administrative costs are included in the premium.
• Self-Funded: Employers may face higher administrative costs due to the need for a TPA and other management tasks.

Employer Risk

Financial Risk

• Fully Insured: The insurance carrier assumes the financial risk, providing stability but at a higher cost.
• Self-Funded: The employer assumes the financial risk, which can lead to significant savings but also potential financial strain. The self funded vs fully insured distinction highlights the trade-off between control and risk versus predictability and stability.

Cost Variability

• Fully Insured: Costs are predictable due to fixed premiums.
• Self-Funded: Costs can fluctuate based on actual claims, making budgeting more challenging.

Plan Customization

Flexibility

• Fully Insured: Limited flexibility in plan design. Employers choose from pre-designed plans.
• Self-Funded: Greater flexibility to customize plans to meet the specific needs of employees.

Vendor Selection

• Fully Insured: Limited to the network and services provided by the insurance carrier.
• Self-Funded: Employers can choose their own vendors, providing more tailored healthcare solutions.

In the next section, we’ll explore a hybrid approach known as level funding, which combines the benefits of both self-funding and fully insured plans.

Level Funding: A Hybrid Approach

Level funding is like a hybrid car—it combines the best features of self-funding and fully insured plans to optimize efficiency and reduce risk. This approach is especially appealing for small to mid-sized employers looking for predictable costs and potential savings.

Fixed Monthly Premiums

With level funded plans, employers pay a fixed monthly premium. This premium covers three main components:

1. Claims Account: A portion of the premium goes into a fund specifically for paying employee claims.
2. Stop-Loss Insurance: This insurance protects against unexpectedly high claims.
3. Administrative Costs: Covers the cost of managing the plan, like claims processing and customer service.

This setup provides the predictability of fixed monthly payments, similar to fully insured plans.

Potential Refunds

One of the standout features of level funding is the possibility of receiving a refund. At the end of the year, if the claims account has money left over (because claims were lower than expected), the employer may get some or all of the surplus back. This is a significant advantage over fully insured plans, where unused premiums are kept by the insurance carrier.

Stop-Loss Coverage

Stop-loss insurance is essential in level funded plans. It acts as a safety net, ensuring that if claims exceed a certain threshold, the stop-loss insurance kicks in to cover the excess. There are two types of stop-loss coverage:

• Specific Stop-Loss: Protects against high claims from any single individual.
• Aggregate Stop-Loss: Protects against total claims exceeding a set limit for the entire group.

This coverage limits the financial risk for employers, making level funding a safer option compared to traditional self-funding.

Small Employer Suitability

Level funding is particularly suitable for small employers. It provides the stability of fixed monthly payments, which is crucial for businesses with tight budgets. Additionally, the potential for refunds offers a financial incentive for maintaining a healthy workforce.

Case Study: A Small Business Success

A small tech startup with 45 employees switched to a level funded plan. They enjoyed the predictability of fixed premiums and ended the year with a surplus in their claims account. This surplus was refunded, providing extra funds to reinvest in the business. The stop-loss coverage also protected them from a few high-cost claims, ensuring financial stability.

In the next section, we’ll dive into frequently asked questions about self funding vs fully insured plans, helping you make an informed decision for your business.

Frequently Asked Questions about Self Funding vs. Fully Insured

What is the difference between self-funded vs fully insured plans?

When comparing self funded vs fully insured plans:

Self-funded plans mean the employer pays for health claims as they occur. This gives the company control over the plan and potential cost savings. However, it also means taking on more financial risk.

Fully insured plans involve paying a fixed premium to an insurance carrier, which then covers the claims. This offers predictability but can be more expensive and less flexible.

What are the disadvantages of self-funding health insurance?

Financial Risk: Employers are responsible for all claims. If employees need expensive treatments, costs can skyrocket.

Administrative Burden: Managing claims, compliance, and plan design can be time-consuming. Many employers hire a Third-Party Administrator (TPA) to handle these tasks.

Compliance Requirements: Self-funded plans must comply with federal regulations like ERISA and HIPAA, adding another layer of responsibility.

How does stop-loss insurance work in self-funded plans?

Individual Stop-Loss: Protects against high claims for a single employee. For example, if the stop-loss amount is $30,000, any claims above this are covered by the insurer.

Aggregate Stop-Loss: Covers the total annual cost of the health plan. This ensures the employer won’t exceed a set financial limit for all claims combined.

Stop-loss insurance is crucial for mitigating the financial risk of large claims, providing a safety net for employers, especially when considering self insured vs fully insured options.

Conclusion

Summary

Navigating the health insurance landscape can be challenging, but understanding the self funding vs fully insured options can help make the right decision for your business. Self-funded plans offer flexibility and potential cost savings but come with financial risks and administrative duties. Fully insured plans provide financial predictability and less administrative work but at a higher cost and less customization. When comparing self insured vs fully insured, it’s essential to evaluate your company’s financial stability, risk tolerance, and need for customization to determine the best fit.

Choosing the Right Plan

When deciding between self-funding and fully insured plans, consider:

• Cost: Can your business handle variable costs, or do you need predictable monthly payments?
• Risk: How much financial risk are you willing to take on? Do you need a safety net like stop-loss insurance?
• Flexibility: Do you want the ability to customize your plan, or are you okay with a standard package?

Understanding the differences between self insured vs fully insured can help guide your decision based on your company’s financial stability, risk tolerance, and desire for customization.

NPA Benefits

At NPA Benefits, we specialize in helping businesses find the right balance between cost, risk, and flexibility. Our expertise can guide you through the complexities of health insurance to ensure you make an informed decision.

Tailored Solutions

We believe in offering health insurance that adapts to you, not the other way around. Whether you’re looking for basic coverage or comprehensive protection, we’ve got you covered.

Cost Savings

Managing healthcare costs is a priority. Our tailored solutions aim to maximize cost savings while still providing comprehensive coverage for your employees.

Flexibility

Flexibility is key in today’s fast-changing world. Whether you need a fully insured plan for simplicity or a self-funded plan for customization, we can help you find the right fit.

By partnering with NPA Benefits, you can navigate the complexities of health insurance with confidence. Let’s create a healthier, more secure workplace together.

Choosing the right health insurance plan is a significant decision, one that impacts both your health and your wallet. Make the informed choice with NPA Benefits, and take the first step towards a healthier, more secure future.