What Is a Self-Funded Insurance Plan?

A self-funded insurance plan, also known as a self-insured plan, is an arrangement where an employer directly assumes financial responsibility for providing healthcare benefits to its employees. Instead of paying fixed premiums to an insurance company, the employer pays for medical claims as they are incurred, often setting aside funds in a dedicated account. This model allows the employer to retain more control over its healthcare benefit program.

Distinguishing Self-Funded from Fully Insured Plans

The difference between a self-funded and a fully insured health plan lies in who bears the financial risk for employee healthcare claims. In a fully insured model, an employer pays a fixed premium to an insurance carrier. The insurance company then assumes the financial risk for paying all covered medical claims. This provides cost predictability for the employer, as the monthly premium remains consistent regardless of actual claims incurred. However, this predictability includes the insurer’s profit margins, administrative fees, and state premium taxes built into the premium.

In a self-funded plan, the employer retains the financial risk for employee medical claims, paying for them directly from its own assets or a designated healthcare fund. The employer essentially acts as its own insurer. This model offers potential cost savings by avoiding the fees and profit margins embedded in fully insured premiums. If actual claims are lower than anticipated, the employer can retain the surplus funds.

While a fully insured plan offers simplicity and predictable monthly costs, it provides less flexibility in plan design. Premiums are based on factors like employee count, projected healthcare costs, and benefit levels, with limited customization. Self-funded plans offer greater flexibility, allowing employers to design benefit packages tailored to their workforce’s needs. This includes choosing specific coverages, managing provider networks, and adjusting benefits. Self-funded plans are governed by federal law, the Employee Retirement Income Security Act of 1974 (ERISA), and are exempt from state insurance regulations that apply to fully insured plans. This preemption allows for consistent plan administration across states.

Key Components of a Self-Funded Plan

A self-funded plan involves several components that manage healthcare benefits. A primary element is the claims fund or account, a designated pool of money the employer sets aside to pay for employee medical claims. Contributions from both the employer and employees may be earmarked for this fund, which the employer draws from as medical expenses are incurred.

Stop-loss insurance is another component, serving as a financial safeguard for the employer. While the employer assumes the primary financial risk, stop-loss insurance protects against unexpectedly high medical costs. There are two types: specific stop-loss and aggregate stop-loss. Specific stop-loss, also known as individual stop-loss, protects the employer from a single employee’s high claim. For example, if a plan has a specific stop-loss limit of $75,000 per individual, and an employee incurs $200,000 in medical bills, the policy would reimburse the employer for the $125,000 exceeding the limit.

Aggregate stop-loss insurance provides protection against the total cost of all claims for the entire group exceeding a predetermined amount over a specific period, typically a policy year. This sets an overall ceiling on the employer’s total claims liability. If total claims surpass this aggregate limit, the stop-loss insurer reimburses the employer for the excess. Most self-funded employers purchase both specific and aggregate stop-loss coverage to mitigate financial exposure.

A third-party administrator (TPA) is an important partner in a self-funded arrangement. While the employer funds the plan, the TPA handles administrative tasks. This includes processing medical claims, providing access to healthcare provider networks, and managing customer service inquiries. The TPA acts as an administrative service provider; it does not bear financial risk for the claims. The TPA’s role is to streamline operations and ensure efficient management, allowing the employer to focus on its core business.

Operational Aspects of Self-Funding

The operation of a self-funded plan involves a division of responsibilities between the employer and the Third-Party Administrator (TPA). The employer’s role centers on funding the claims account and maintaining oversight. This includes making regular contributions to the claims fund, ensuring sufficient liquidity for anticipated medical expenses. Employers also retain responsibility for the plan’s design and compliance with federal regulations, such as ERISA.

For employees, the experience of a self-funded plan is similar to a fully insured plan. Employees receive an insurance card to present to healthcare providers. They access medical services through established provider networks, arranged by the TPA. The process for claims submission remains unchanged from an employee’s perspective, with the TPA handling administrative aspects. This seamless experience helps ensure employee satisfaction and minimizes disruption during a transition to self-funding.

Claims processing begins when an employee receives care from a healthcare provider, who submits the claim to the TPA. The TPA verifies the claim against the plan’s benefits, eligibility, and network agreements. Once validated, the TPA processes the claim and arranges for payment directly from the employer’s claims fund. This direct payment from the employer’s funds, rather than an insurance carrier’s, is an operational distinction. The TPA also handles coordination with stop-loss carriers for claims exceeding specific or aggregate thresholds.

Financial management is a continuous process in a self-funded plan. Employers rely on actuarial guidance to forecast expected claims and determine funding levels for the claims account. This involves analyzing historical claims data and employee demographics to project future healthcare utilization and costs. The goal is to maintain adequate reserves to cover claims while optimizing cash flow. Any surplus funds at the end of a period, if claims are lower than projected, can be retained by the employer, offering a financial advantage not typically available with fully insured plans.