What Is “Self-Funded” Group Health Insurance & How Does It Work?
Friday, January 3, 2020 12:41 Posted by Admin
If you are interested in setting up a new
group health insurance plan for your company, you may have heard about
“self-funded” group health insurance. What is this type of health insurance?
How does it work, and is it right for your company?
In this guide from Taylor Benefits Insurance
Agency, we’ll give you a basic overview of how self-funded group health
insurance works – and whether or not it might be right for your company. We’ll
also answer some FAQs about this type of coverage. Read on, and get all the
details you need about self-funded group health insurance.
The Basics About Self-Funded Group Health Insurance
As the name may suggest, a “self-insured” or
“self-funded” group insurance plan is a plan in which the employer assumes the
responsibility of providing healthcare benefits for its employees.
In contrast to a traditional insurance plan,
which involves paying fixed premiums to a third-party insurer to assume the
responsibility for providing healthcare benefits (a fully-insured plan), a
self-funded group insurance plan pays out of pocket for these claims.
When setting up a self-funded plan, the
company will set up a special, tax-free trust fund. Then, funds from both
employee and corporate contributions will be used to pay incurred claims. As
employees get health care services and file for claims, the money in this trust
fund is used to pay for their care.
In simpler terms, self-funded group health
insurance works like this. Employees and the employer both pay monthly
“premiums,” which are earmarked and sent into the group “fund” for health care.
Then, as healthcare services are required, claims are filed – and paid from
this group fund.
Essentially, the company is pooling together
the premiums of its employees – and using this money to pay for healthcare,
rather than working with a third-party insurer. This has a number of unique
benefits – which we’ll discuss a bit later in this article.
A Self-Funded Group Health Insurance Plan Administered?
So, we’ve explained the basics of how
self-funded insurance plans work. But who administers them? That is, who is
responsible for processing claims, approving them, and releasing funds when an
employee gets medical care under the insurance scheme?
There are two major options for employers who
are offering a self-funded group health insurance plan.
- In-house administration – In this method of
self-funded group health insurance plan administration, the entire process of
administering claims and managing the health insurance plan is done in-house by
specialized employees. This is relatively more common in smaller companies,
where it is not necessary to manage the healthcare needs of hundreds – or
thousands – of employees.
- Third-party administrator (TPA) – A Third
Party Administrator (TPA) is, essentially, a subcontractor who provides claims
administration services to businesses. They provide services such as claims
adjudication, onboarding for new employees when they join the health insurance
plan, billing management, and more.
Essentially, the TPA provides all of the services necessary to administer the
health insurance plan properly. The specifics of these services will vary
greatly based on the insurance plan, size of your company, programs you want to
offer and other such details.
The choice between in-house administration and
using a TPA is not always an easy one, so it’s a good idea to work with a
qualified insurance broker while designing your plan. This will ensure that you
make the right choice.
The Benefits Of A Self-Funded Group Health Insurance Plan
Now that you understand what a self-funded
group insurance plan is and how it is administered, you may be wondering why
any company would choose to use this method of insurance rather than a
traditional group health insurance plan. Here are just a few reasons.
- Lower overall monthly costs – Of course, this depends on your individual plan and your needs. But often, monthly costs for this type of plan are much lower – because they only have to reflect the costs of expected employee claims.
As a simplified example, if you expect each employee to require $3,600 per year in health care coverage, you and your employees will need to pay in a total of $300/month to ensure complete coverage – along with some additional monthly costs to pay for stop-loss insurance and administrative fees.
- Opportunity to get money back at the end of the year – When an employee or employer pays a premium in a traditional health care plan, it’s gone. That money goes directly to the insurer to cover the cost of group healthcare coverage.
That’s not the case for a self-funded plan. The premiums that you and your employees pay will all go into a dedicated trust fund – where they are held for the payment of claims.
If you set aside $250,000 in funds to pay for health care claims over the course of the year and your employees have only filed $150,000 in claims, for example, some of the remaining $100,000 in funds could be distributed back to employees.
- Maintain control over health care reserves & earn interest – You can earn interest income on the funds that are kept in health care reserves – and this is income that, otherwise, would have gone directly to the insurance carrier.
- More flexible, customizable benefits packages
– With a self-insured policy, you are not bound by the same regulations and
laws of traditional insurers (we’ll discuss that in-depth in the next point).
What this means is that you can develop a healthcare plan that is customized
and tailored to the needs of your employees – rather than the general
population. You can develop a plan that meets the unique health care challenges
of your employees, and customized the benefits you provide accordingly.
- Not subject to some governmental regulations –
There are certain state mandates that all insurance plans must abide by –
unless you have a self-insured policy. Self-insured policies are exempt from
state mandates because they are regulated under ERISA, a federal law.
For example, while a state may mandate full coverage of a particular surgery,
this regulation may not apply to your company due to its self-insured status.
This can decrease overall healthcare costs, and simplify the administration of
- Subject to fewer taxes and fees – Most health
insurance plans are subject to state health insurance premium taxes. These vary
based on the state, of course, but can be as high as 2-3% of the total dollar
value of the premium.
With a self-funded health insurance plan, there is no need to pay any kind of
taxes to the state, which helps save money.
For all of these reasons – and quite a few
more – self-funded group health insurance can be a very useful tool for larger
companies that have a strong enough cash flow to sustain such a plan.
FAQs About Self-Funded Group Health Insurance
Next, let’s answer a few common FAQs about
self-funded group health insurance and how it works.
- Is self-funded insurance the best option for every employer? No. Because self-insured employers are assuming the risks of paying health care costs for employees, they must have strong enough cash flow to meet these obligations.
For small businesses or companies with poor overall cash flow, this may not be a viable option. Self-funded insurance is usually only used for larger group health insurance plans.
- What happens if there are unpredicted or catastrophic claims? While most large companies have enough cash reserves to protect against any amount of health care costs, smaller companies may not be able to cover the cost of a large number of catastrophic claims.
To prevent this, a “stop-loss” insurance policy is used. Essentially, this policy reimburses the employer for any health care claims above a specified amount. For example, if an employer expects to only pay $150,000 in claims in a given year – and budgets accordingly – the can buy a stop-loss policy that pays out if this $150,000 limit is exceeded.
This contract is exclusively between the insurer and the employer. The individual plan participant is not involved in this process. As long as a stop-loss policy is in place, there is no need to be concerned about the ability of a self-funded group plan to remain solvent.
- Are there payroll deductions for a self-funded plan? This depends on the plan. However, most employers do require employees to contribute to their coverage through a payroll deduction.
This deduction will function just like a payroll deduction for a standard health insurance plan. Based on the specifics of the plan, funds will be taken out of your paycheck. But instead of being sent to an insurance company for premiums, this money is put into the tax-free trust controlled by the employer – to pay for claims and fees incurred by the self-funded plan.
- How is a self-funded group health insurance plan developed? The process of creating a self-funded group health insurance plan can be complicated. For this reason, most companies engage the services of a health insurance broker, such as Taylor Benefits Insurance Agency.
By working with a broker, businesses can develop a plan that meets the needs of their company and their workforce, determine coverages and exclusions, develop long-term health care plan goals, and much more.
Self-Funded Group Health Insurance Plan Right For Your Company? Find Out!
If you are interested in the various benefits
of a self-funded group health insurance plan and you would like to compare
self-funded insurance to traditional insurance, Taylor
Benefits Insurance Agency is here to help.
We have years of experience helping businesses
of all sizes find the right group health insurance plans for their needs – so
to learn more and get started, just contact us now.