All group medical benefit plans fall
into one of two categories self-funded, or fully insured. Here at The College of Saint Scholastica, both our high deductible health plan with a health savings account and
our 80/20 plan are self-funded. So, what are the main differences? A
fully insured plan is what most people think of when they think of health
insurance. Premiums are paid to an insurance company who pays the medical claims.
A self-funded plan is when premiums are transferred to an employer held
account from which claims are paid. 61% of covered workers in the United States are in a plan that is self-funded and this number is increasing. under a self-funded all plan, the
employer sets the premium rates based on claims history and set
administrative fees paid to a third party administrator for processing
claims. The employer pays claims out-of-pocket from collected premiums. Under a
fully insured plan, A set premium is paid to the health insurance company. Under a self-funded plan, the employer assumes all or a portion of the risk for health insurance claims. Usually as is the case for the College, separate stop-loss insurance is
purchased to protect against very high claims. Under a fully insured plan, the
insurance company assumes all of the risk for a higher premium. In self-funded plans, there is greater flexibility in plan design, network,
and administration. An employer can choose level of coverage, network, and
the amount of deductibles, coinsurance, and out of pocket maximums per covered member. Under a fully insured plan, plan design, network and an administrative options are limited. So what are the advantages of a self-funded plan? One of the biggest advantages of a self funded plan is that it can have a positive impact on the organization’s cash flow.
With a fully insured health plans, employers pay an insurance provider in
advance to cover projected to claims, in addition to the insurers overhead and
administrative costs. However, in a self-funded plan, the money collected by the organization is only paid out when claims actually occur, and can stay in a reserve account accruing interest until it is needed. In addition, if
claims during a particular month are lower than anticipated that money adds
to the reserve and earns additional interest, creating a long-term financial benefit. Under a fully insured plan, there is no benefit to the employer or employee if the claims come in lower than projected. Health insurance companies typically charge between 3% and 10% for margin or fluctuation in claims. Under a self-funded arrangement, this component is eliminated.
In other words, health insurance companies profit by setting higher
margin, and could create inflated premiums under a fully insured
arrangement. Under self-funded plans, the fact that employers are directly paying for health insurance claims, also
makes wellness programs and other incentive programs more relevant. With fully insured plans, wellness initiatives generally do not result in significantly lower costs. However, in a self-funding scenario, an overall improvement in employee health can lead to an immediate
reduction in claims which feeds back into the reserve fund.
If those trends continue, there may be a reduction in the necessary contributions
made by both the employer and the employee. As another advantage,
organizations may be able to customize self-funded plans. Self funding allows for some flexibility to meet the needs of employees and help
reduce overall plan costs. Under self-funded Arrangements, an employer may
choose the amount of risk to retain and the amount to be covered under stop-loss
protection. So what are the disadvantages of a self-funded plan?
The main risks of self-funding involve situations when, for unforeseen reasons,
claims are higher than anticipated. While stop-loss coverage will protect
employers from paying excessive claims in a given year, the cost of that
coverage will likely increase, and it may be more difficult to get rates from
other stop-loss providers. Higher than expected claims in a self-funded plan
may also make it more difficult and more expensive for insurers to go back to a
fully insured plan in the future. Under a self-funded plan, the current year
expenses may be unpredictable and could change without warning, whereas, in a
fully insured arrangement, the insurance company takes on that risk. Again, both of
the health insurance plans offered by the College are self-funded arrangements.
As our premiums are directly tied to our overall claims, the College offers a
robust wellness program brought to you by WellU. This program aims to educate
our employees about best practices to help reduce our overall health insurance
cost with early intervention and prevention. Remember, we are all in this