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What is a self-funded medical insurance plan?

Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted...

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella...

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UPDATED: Mar 19, 2020

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The lowdown...
  • Self-funded plans are an alternative to employer group plans
  • Popular in both the private and public sectors
  • Employers assume financial risk of covering claims costs
  • Requires adequate cash flow to work successfully
  • Governed by federal laws and unaffected by state legislation
  • Helps employers lower costs and improve coverage options for enrollees

According to healthcare.gov, a self-funded, or self-insured plan is when the employer collects the premiums from enrollees and becomes responsible for paying the medical claims of employees and their dependents. These plans are either self-administered or the employer contracts with a third party for provider networks, processing claims, and enrollment.

Instead of paying fixed premiums like on fully-insured plans, the employer assumes the financial risk and pays each claim out of pocket as they are incurred.

Often times, employers will designate a trust fund specifically for earmarking employee and corporate contribution for paying the claims incurred. According to the Employee Benefit Research Institute, there were 50 million employees receiving benefits from employers sponsoring self-funded group health insurance in 2000.

This data suggests that approximately a third of the 150 million participants enrolled under employment-based private insurance plans in the United States.

Benefits of Using Self-Funded Insurance Plans

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There are a number of reasons that compel certain employers to choose self-funded insurance over full-insured plans. Instead of the one-size-fits-all approach used for conventional plans, self-funded insurance allows employers to customize their plan based on the specific health needs of their employees. Interest income is typically generated by the insurer by investing premium dollars.

Self-funded plans allow employers to maximize the interest income by providing more control over the health plan reserves.

Self-insured plans can also help improve cash flow since employers no longer have to pre-pay the insurer for coverage. Self-funded plans are governed by the federal Employee Retirement Income Security Act of 1974, so employers are not subjected to any conflicting state benefit mandates or insurance regulations.

Self-funded plans are also exempt from taxes on state health insurance premiums, typically accounting for up to 2 percent of the annual premium expense. Self-insured plans allow employers to contract with a provider network or specific providers that are the best fit for fulfilling the medical needs of their employees.

Assessing Self-Funded Plans

Self-funded medical insurance plans are not ideal for all employers. In order to offer a self-funded insurance plan, employers must have the cash flow to take on the unpredictable costs for employees health care claims. Self-insured plans may not be a viable option for employers with poor cash flow and small businesses.

However, there are a number of businesses with at least 25 employees that have been able to offer employees an adequate self-funded insurance plan.

Employer Protections with Self-Funded Plans

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Many of the larger employers have enough in their financial reserve to account for any unexpected health care costs. The majority of the employers offering self-funded plans have stop-loss insurance so they can be reimbursed for claims that exceed a predetermined dollar amount.

The employer contracts with a stop-loss carrier to obtain this insurance contract, but it’s not a policy designed to cover enrollees with individual plans. In addition to the aforementioned service, third-party administrators can help coordinate the stop-loss insurance coverage for employers as well.

Laws Governing Self-Funded Insurance Plans

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Aside from ERISA, some of the other federal legislation governing how self-funded plans operate include:

  • The Economic Recovery Act
  • The Deficit Reduction Act
  • The Tax Equity and Fiscal Responsibility Act
  • The Consolidated Omnibus Budget Reconciliation Act
  • The Health Insurance Portability and Accountability Act
  • The Americans with Disabilities Act
  • The Civil Rights Act
  • The Age Discrimination in Employment Act
  • The Pregnancy Discrimination Act

Self-funded Government Plans, Non-Federal

Governmental plans that are non-federal can operate as self-insured healthcare plans. Governmental plans can also offer a mixture of full-insured and self-funded options as well. The Affordable Care Act reduced the number of Public Health Service Act requirements that sponsors of governmental self-funded healthcare plans are permitted to opt out of.

Sponsors of self-funded government plans are not exempt from any of the annual limits or restriction implemented by the Patient’s Bill of Rights.

The exemptions governmental employers can elect for from the PHS Act are the requirements contained in Title XXVII. This section of the PHS Act was originally added by HIPPA.

Since then, Title XXVII has been amended by a number od subsequent legislation including:

Evaluating Self-Funded Insurance Plans

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Self-funded insurance plans are widely used among private and governmental employers in the United States. These plans provide some employers with more flexibility to accommodate their unique workforce.

If there are no cash flow issues, these employers may be able to lower costs while providing enrollees and their dependents with more comprehensive coverage than the more conventional, fully-insured plan.

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