What is self-funded plans?

Self-funded health plans, also known as self-insured plans, are a type of health insurance arrangement where the employer assumes the financial risk for providing health benefits to employees. Instead of paying a fixed premium to an insurance company, the employer pays for medical claims directly as they arise. This model offers several advantages and considerations for organizations looking to manage their healthcare costs effectively.

In a self-funded plan, the employer takes on the responsibility of covering employee healthcare claims, which can lead to significant cost savings compared to traditional fully-insured plans. According to the Kaiser Family Foundation, about 61% of covered workers are in plans that are either fully or partially self-funded1. Employers typically set aside funds in a trust to cover anticipated claims and may hire third-party administrators (TPAs) to manage the plan’s operations, including claims processing and benefit administration.

Advantages of Self-Funding Plans

1. Cost Savings: Self-funded plans can reduce administrative costs and eliminate profit margins that insurance companies would otherwise include in premiums. This allows employers to spend more directly on employee care rather than on overhead.
2. Cash Flow Management: Unlike fully-insured plans where premiums are paid monthly regardless of claim activity, self-funded plans allow employers to pay claims as they occur. This can lead to improved cash flow management and potential savings if claims are lower than expected.
3. Customization: Employers have more flexibility to design benefits that meet the specific needs of their workforce, tailoring coverage options without being constrained by standardized insurance products.
4. Regulatory Advantages: Self-funded plans are generally subject to fewer regulations compared to fully-insured plans, allowing employers more freedom in plan design and administration.

Risks and Considerations

Despite the benefits, self-funding carries inherent risks. Employers must be prepared for the possibility of high claims costs, particularly if catastrophic health events occur among employees. To mitigate this risk, many employers purchase stop-loss insurance, which provides coverage for claims that exceed a certain threshold. Additionally, employers need to ensure they have adequate cash reserves to cover unexpected claims.