What Is a Self-Funded Insurance Plan?
Learn about self-funded insurance plans, an alternative healthcare model offering employers direct control over costs and employee benefits.
A self-funded insurance plan offers an alternative approach to employee health benefits. An employer directly assumes the financial risk for its employees’ healthcare costs, rather than transferring that risk to an insurance carrier. This allows for greater control over benefit design and financial management.
What Self-Funded Insurance Means
Self-funded insurance shifts the financial responsibility for employee healthcare to the employer. Instead of paying fixed premiums to an insurance company, the employer pays for each healthcare claim as it arises, covering costs like doctor visits, hospital stays, and prescription drugs. The difference from fully insured plans lies in who bears the financial risk. If claims are lower than anticipated, the employer retains savings; if higher, the employer is responsible for the costs. This allows employers to control health plan reserves and improve cash flow by paying claims only when they occur.
How Self-Funded Plans Operate
A self-funded plan involves the employer setting aside funds for healthcare expenses, often in a trust fund. When an employee receives services, the employer or a contracted administrator pays the claim from this fund. While the employer retains financial responsibility, many contract with a third-party administrator (TPA) for day-to-day tasks. The TPA manages claims, eligibility, and customer service, drawing from the employer’s deposited funds to pay providers.
Critical Elements of Self-Funded Plans
Self-funded plans incorporate components to manage financial exposure and administrative duties.
Stop-Loss Insurance
Stop-loss insurance protects employers against high healthcare costs. This insurance reimburses the employer for claims exceeding predetermined thresholds. There are two types: specific stop-loss, which protects against high claims from a single individual (e.g., after $50,000), and aggregate stop-loss, which protects when total claims exceed a certain amount (e.g., 125% of expected claims for the year).
Third-Party Administrators (TPAs)
Third-Party Administrators (TPAs) are integral to self-funded plans. These organizations manage administrative tasks, including processing medical claims, providing network access, and offering customer support. TPAs replicate the administrative experience of a fully insured plan without assuming financial risk. Their services allow employers to focus on their core business while ensuring smooth benefit delivery.
Administrative Services Only (ASO) Contracts
Administrative Services Only (ASO) contracts are agreements between self-funded employers and TPAs or insurance carriers. Under an ASO arrangement, the employer pays a fee for administrative services, such as claims processing and network management. The employer retains full responsibility for paying actual claims. These contracts ensure administrative tasks are handled professionally.
Contrasting Self-Funded and Fully Insured Models
Self-funded and fully insured health plans differ significantly in financial risk, premium structure, regulatory oversight, plan design, and data access. In a fully insured model, an insurance carrier assumes the financial risk, and the employer pays a fixed monthly premium. With self-funded plans, the employer directly bears the financial risk, paying for claims as they occur, which introduces variability in monthly expenditures.
Regulatory oversight also differs. Fully insured plans are primarily regulated by state insurance laws, which can vary. Self-funded plans are largely governed by federal law, specifically the Employee Retirement Income Security Act of 1974 (ERISA). ERISA preempts most state insurance laws, providing consistent regulatory requirements and exemption from state premium taxes.
Self-funded plans offer greater flexibility in plan design. Employers can customize benefit packages to meet workforce needs, including tailored wellness programs and chosen provider networks. This contrasts with fully insured plans, which often come as “one-size-fits-all” products.
Self-funded employers gain direct access to their claims data, offering transparency into healthcare spending. This allows for detailed analysis of costs and targeted strategies for cost containment. In fully insured plans, detailed claims data is retained by the insurance carrier, limiting the employer’s ability to understand and influence healthcare utilization.