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Self-Funding or Fully-Insured — What’s HR to Do?

As the Affordable Care Act (ACA) has been rolled out over the past few years, many employers have been researching the option of self-funding their benefit plans. There are advantages and disadvantages fullyinsured vs selfinsuredbetween self-funded or fully-insured plans. The right decision will differ from employer to employer. It can be overwhelming to evaluate between the two but it’s worthwhile since one choice versus the other can have significant cost savings for a company. Before making a choice, you’ll want to do a thorough analysis of your claims, your group demographics and your forecasted claims. Let’s simplify the process with some basics to at least spark the discussion with your team.

So, what’s the difference between fully-insured and self-funded? A fully-insured plan means the company pays the insurance provider to administer the plan, set up networks and manage the coverage. The insurance provider dictates what is covered, who is part of the network and what processes are required for higher cost drugs or procedures. The claims are paid by the insurance company and the company pays a consistent premium on a per member per month basis. A self-insured plan means the company pays claims, determines their networks and dictates plan design. The company has the freedom to determine what their plan looks like and how it works. Self-funded plans can “lease” networks from major insurance carriers or they can build their own networks through an established board. Basically, the one who is paying the claims gets to make the rules on plan design and coverage levels.

It is important to evaluate premiums. Under a fully-insured plan premiums are determined by the insurance company. The insurance company will evaluate your last three years of claims to determine what it will cost to cover the group in the future. If the premiums are greater than the claims at the end of the year then the insurance company keeps those funds as profit. (Note: There is a medical loss ratio under the ACA that can limit this profit but let’s save that for another day.) Under a self-funded plan the employer contributes a designated amount of money for the plan to operate. This designated amount is either a lump sum contribution from the first day of the plan year or a budgeted monthly contribution. If the funds contributed are greater than the claims at the end of the plan year then those funds are returned to the company.

What about stop loss coverage? Self-funded plans require that an employer sets up a stop loss plan. This is an insurance plan that covers claims after they hit a certain level. For example, let’s say you purchase a stop loss plan for all claims that surpass $250,000. You have an employee who has a lung transplant that costs over $1,000,000. The employer’s health plan will be responsible for the first $250,000 and then the stop loss will pick up everything over $250,000. Employers can be reluctant to make the change to self-funded plans because of the fear of these high dollar claims. Stop loss plans can help to cap that exposure and relieve some fear. Keep in mind that these claims were already being passed onto the employer under fully-insured plans. Since these claims are built into the premium renewal amounts by the insurance provider, employers are already paying for these claims. The difference is that the employer would start paying these claims directly rather than through the monthly premiums.

There’s a lot to consider between these two options for funding your group health plans. There is potential for profit, but there is also potential risk. Take your time. Start your evaluation early and involve multiple parties to get different perspectives so you can make the right choice for your group.

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