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Health Insurance: Self Insured vs Fully Insured

By July 21, 2020 No Comments
self insured vs fully insured

What’s the difference between self insured vs fully insured?

When it comes to health insurance, we know the process can feel complex.

Our goal:

To make it simple. To make it digestible. To make it easy for you to understand.

Your company’s group health insurance is likely one of your largest line items on the balance sheet.

It’s for this reason that making careful and strategic decisions about your group health insurance is critical.

Not only will it impact your people, but also the financial health of your business.

All group health insurance plans fall into one of two categories:

Self insured and fully insured.

The choice of one over the other should not be made arbitrarily.

Each option carries its own set of opportunities, challenges, rules and legal constraints.

The difference between self insured vs fully insured lies within these four categories:

  • Payments
  • Assumption of Risk
  • Plan Design
  • Compliance Payments

Here’s a quick high-level snapshot of the difference between a self insured and fully insured health plan.

Self-Insured vs. Fully Insured

Now let’s get into the details.

What is a self insured health plan?

A self insured health plan is one in which the employer assumes financial risk associated with employees claims. 

Rather than paying a fixed premium to an insurance company every month (through a fully insured health plan) employers assume the risk of paying claims, and pays out-of-pocket as claims are incurred.

A self-insured health plan is a funding arrangement in which the employer assumes direct financial responsibility for the costs of enrollees’ medical claims.

Self insured vs fully insured: How do they differ?

A fully insured health plan is the traditional way to structure an employer sponsored health plan.

With a fully insured health plan:

  • The company pays a premium to the insurance carrier
  • The premium rates are typically fixed for a year, based on the number of employees enrolled in the plan each month
  • The monthly premium normally only changes during the year if the number of enrolled employees in the plan changes
  • The insurance carrier collects the premiums and pays the health care claims based on the coverage benefits outlined in the policy purchased
  • The covered persons (that is, employees and dependents) are responsible to pay any deductible amounts or copayments required for covered services under the policy

With a self insured health plan, employers operate their own health plan as opposed to purchasing a fully insured plan from an insurance carrier.

One reason employers choose to self insure is that it allows them to save the profit margin that an insurance company adds to its premium for a fully insured plan.

However, self insured health plans can expose the company to much larger risk in the event that more claims than expected must be paid.

With a self insured health plan, there are two main costs to consider: fixed costs and variable costs.

Fixed costs include administrative fees, any stop-loss insurance premiums and other set fees charged per employee. These costs are generally billed monthly by the third-party administrator (TPA) or carrier handling plan administration, and are charged based on plan enrollment.

Variable costs include payments of health care claims. These costs vary from month to month based on health care use by covered persons (that is, employees and dependents).

To limit risk, some employers use stop-loss insurance which reimburses the employer for claims that exceed a predetermined level.

This coverage can be purchased to cover catastrophic claims on one covered person (specific coverage) or to cover claims that significantly exceed the expected level for the group of covered persons (aggregate coverage).

Stop Loss Insurance

Employers with a self insured health plan typically carry stop loss insurance to reduce the risk associated with large individual claims or high claims from the entire plan.

The employer self insures up to the stop-loss attachment point.

The stop-loss attachment point is a dollar amount above which the stop-loss carrier will reimburse claims. 

Stop-loss insurance comes in two forms:

  • Individual or specific stop-loss
  • Aggregate stop-loss

Individual / Specific Stop-Loss Insurance

This form of stop loss protects a self insured employer against large individual health care claims.

Essentially, it limits the amount that the employer must pay for each individual.

For example, an employer with a specific stop-loss attachment point of $25,000 would be responsible for the first $25,000 in claims for each individual plan participant each year.

The stop-loss carrier would kick in and pay any claims exceeding $25,000 in a calendar year for a particular participant.

Aggregate Stop-Loss Insurance

This protects the employer against high total claims for the health care plan.

For example, aggregate stop-loss insurance with an attachment point of $500,000 would begin paying for claims after the plan’s overall claims exceeded $500,000. 

Any amounts paid by a specific stop-loss policy fo the same plan would not count toward the aggregate attachment point.

ERISA vs. State Regulation

Self insured health plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA). 

ERISA preempts state insurance regulations, meaning that employers with self insured health plans are not required to comply with state insurance laws that apply to medical benefit plan administrators. 

On the other hand, fully insured health plans must comply with some of ERISA’s requirements, but are primarily governed by the state where covered employees reside.

The distinction between state and ERISA regulation is key when determining if self insured is right for your organization.

Multi-state companies with fully insured health plans must comply with the regulations of each state in which they have plans and covered employees.

Multi-state self insured health plans need only comply with ERISA.

Premium vs. Unbundled Fees

The risk an insurance company takes with a fully insured health plan can be translated into a dollar amount for the employer.

That dollar amount is the premium an employer pays each month for the fully insured health plan.

This monthly premium on a fully insured plan includes:

  • Current and predicted claims costs
  • Administrative fee
  • Premium tax paid to the state
  • Insurance company profit

Employers who opt for a self insured health plan do not pay the premium tax or insurance company profit.

They do, however, assume the costs of paying for claims and administrative functions.

Typically, employers with self insured health plans outsource the plan administration to a third party administrator (TPA) or insurance company who charges the employer a fee for performing administrative services.

Need help finding a TPA? Download our TPA Carrier Questionnaire.

When Should I Consider a Self Insured Health Plan for my Business?

You should begin to evaluate the option of moving to a self insured health plan when you reach around 100 employees. 

There are stages to help you move incrementally from fully insured to self insured, to support a gradual increase in your risk appetite. 

Fill out this questionnaire to help determine if you’re ready to move to a self insured health plan.

Self insured evaluation form

What is the Risk Associated with a Self Insured Health Plan?

The risk assumed in either situation is the chance that employees will become ill and require costly treatment.

When employees have few claims and few expensive illnesses, the self insured employer sees a positive impact on overall health care costs.

Conversely, if the employee group has an unfavorable claims experience, a self insured employer would incur an immediate expense beyond what may have been expected.

Fully insured plans have a more predictable cost for the year; however, large employee claims costs from one year can affect future premium amounts.

We outline this in more detail in our article, pros and cons of a self insured health plan.

Nondiscrimination Rules

Nondiscrimination rules require employers to offer employee benefits that do not favor certain employees.

Employers with fully insured plans do not have nondiscrimination rules for group health insurance, providing they follow the policy requirements of the sponsoring insurance carrier.

However, employers with self insured plans are required to comply with nondiscrimination rules.

Generally, these requirements are not difficult to meet, but failure to comply can result in some employees having their benefits treated as taxable income.

Employers with either type of health insurance plan are required to comply with certain reporting and disclosure requirements, usually by providing tax and other pertinent documents to the United States Department of Labor or to their particular state.

Typically, self insured health plans are required to provide copies of plan communications such as summary plan descriptions (SPDs) and summary of material modifications if the plan language changes.

Employers with insured plans that require employee contributions must file certain financial documents with the U.S. Internal Revenue Service (IRS). IRS filings are also required of self insured health plans, including Form 5500 and any accompanying documents.

Is a Self Insured Health Plan a Fit For You?

At this point, if you see value in determining whether a self insured plan is a fit for you, let’s talk.

After our call, if you don’t want to move forward, that’s fine too.

Worst case is that you receive free consultation from a licensed Benefits advisor which will position you to make informed decisions on your group health insurance.

Ultimately, this is for executives who are ready to take more control over their company’s healthcare costs, and who seek to understand the opportunities a self insured plan can provide to their bottom line.

If that’s you, today is the day to take action and get the information you need.

Click the button below to request a free consultation from a licensed Benefits Advisor. 

Request a Free Benefits Consultation
Components of this article were adapted from Zywave. This is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.