How to weigh the pros and cons of self-funded vs. fully insured health plans

For companies that must deal with how best to handle health insurance costs, there’s a decision that needs to be made fairly early in the process. Should a company choose to be fully insured, or should it opt to be self-insured?

“Choosing the right kind of health plan is an important part of the success and growth of a company,” says John Mills, senior director of consumer products at UPMC Health Plan. “There are a lot of misconceptions about which plans are right for which kinds of companies and you have to look at all the evidence before you decide.”

Smart Business spoke with Mills about the advantages and disadvantages of self-funded and fully funded plans for companies large and small.

What is the difference between self-funding and fully insured?

The traditional definition of self-funding is when a company pays for its own medical claims directly, usually while a third-party administrator (TPA) processes claims, issues ID cards and performs the function of a health plan.

In contrast, when a company chooses to be fully insured — the more common option for smaller businesses — the company pays a set premium price to the carrier that is fixed for the year and is based on the number of employees enrolled each month. The insurance company assumes the financial and legal risk of loss if claims exceed projections.

Can small companies afford to be self-funded?

Companies with fewer than 250 employees are often afraid that they will be exposed to too much risk with a self-funded plan.

However, smaller companies can still afford to be self-funded because they can purchase stop-loss insurance, which limits the amount of claims expenses an employer would be liable for, per covered employee, per year. This protects a company against some sort of catastrophic event involving one or more employees. Stop-loss insurance reimburses an employer’s health plan for claims above a pre-set limit.

What are the advantages of self-funding?

The most obvious advantage is paying for actual claims incurred by your employees. This means there is no chance of being ‘penalized’ if your employees in a given year use fewer medical services than had been anticipated. Any positive results that come from a company instituting wellness programs and smoking cessation campaigns can have a direct result on the bottom line.

Also, a company can easily obtain a company-specific claims report that can reveal, for instance, what percentage of claims are out-of-network, and how much is being spent on emergency room visits. This kind of information can provide direction when it comes to customizing benefit changes.

What are the advantages of fully funded plans?

Cost certainty is a major one. You know at the beginning of the year what will be your health care costs and they remain in place until a new deal is struck. Also, the health insurer assumes all of the risk and the company is spared any exposure.

What are some disadvantages to self-funding?

Self-funded plans that greatly exceed anticipated costs can create problems. Although stop-loss coverage can protect an employer from paying excessive claims in a given year, after a major incident, the cost of the stop-loss coverage the company purchases is likely to rise. It may also be more difficult to get lower rates from other stop-loss providers.

Moreover, higher-than-expected claims in self-funded plans can make it more difficult to return to a fully funded plan later. And, any organization that chooses to run a self-funded plan internally, rather than use a TPA, can run up higher-than-expected administrative costs.

Self-funding is not a quick fix and savings are not always guaranteed or immediate. In order to make a good decision, you need to study past coverage utilization, cash flow and the health status of the employees being covered.

Insights Health Care is brought to you by UPMC Health Plan