What is self insurance or self funding?
Most employers search for methods of lowering their company’s spending on their health benefit plans. A Self Funded, or Self-Insured plan, is one in which the employer assumes the financial risk for providing health care benefits to its employees. In practical terms, Self-Insured employers pay for claims out-of-pocket as they are presented instead of paying a pre-determined premium to an insurance carrier for a Fully Insured plan. Typically, a self-insured employer will set up a special trust fund to earmark money (corporate and employee contributions) to pay incurred claims.
In a self-funded — also known as self-insured — health plan, the employer takes on direct financial responsibility for employees’ health care costs. Rather than being part of a larger risk pool, an employer that self-funds takes on the risk for its employee group alone. All of a health plan may be self-funded, or an insurance contract might be purchased to cover certain types of claims. Most self-funded employers buy stop-loss insurance to cover catastrophic claims
Being exempt from state insurance laws and mandates and not having to pay premiums on a regular basis to an insurance company can result in substantial cost savings. Yet, many employers, especially smaller employers, shy away from self-funding, perceiving it as too risky.
According to a Kaiser Family Foundation Health Benefits Survey, about 55 percent of all employees covered for health care are in self-funded plans. Among employers with 200 or more workers, 77 percent of employees are in self-funded health plans, compared to 12 percent of employees in firms with 3–199 workers.
What is a TPA?
A third party administrator (TPA) is an entity that processes or adjudicates claims for an employee benefit plan. A TPA may provide additional services to an employee benefit plan or employer, such as collecting premiums, contracting for PPO services, providing utilization review of claims, and similar ancillary services to the operation of the employee benefit plan. Self-insured employers can either administer the claims in-house, or subcontract this service to a TPA.
Why do employers self fund their health plans?
There are several reasons why employers choose the self-insurance option. The following are the most common reasons:
- The employer can customize the plan to meet the specific health care needs of its workforce, as opposed to purchasing a ‘one-size-fits-all’ insurance policy.
- The employer maintains control over the health plan reserves, enabling maximization of interest income – income that would be otherwise generated by an insurance carrier through the investment of premium dollars.
- The employer does not have to pre-pay for coverage, thereby providing for improved cash flow.
- The employer is not subject to conflicting state health insurance regulations/benefit mandates, as self-insured health plans are regulated under federal law (ERISA).
- The employer is not subject to state health insurance premium taxes, which are generally 2-3 percent of the premium’s dollar value.
- The employer is free to contract with the providers or provider network best suited to meet the health care needs of its employees.
Is self-insurance the best option for every employer?
No. Since a self-insured employer assumes the risk for paying the health care claim costs for its employees, it must have the financial resources (cash flow) to meet this obligation, which can be unpredictable. Therefore, small employers and other employers with poor cash flow may find that self-insurance is not a viable option. It should be noted, however, that there are companies with as few as 25 employees that do maintain viable self-insured health plans.
Can self-insured employers protect themselves against unpredicted or catastrophic claims?
Yes. While the largest employers have sufficient financial reserves to cover virtually any amount of health care costs, most self-insured employers purchase what is known as stop-loss insurance to reimburse them for claims above a specified dollar level.
With what laws must self-insured group health plans comply?
Self-insured group health plans come under all applicable federal laws, including the Employee Retirement Income Security Act (ERISA), Health Insurance Portability and Accountability Act (HIPAA), Consolidated Omnibus Budget Reconciliation Act (COBRA), the Americans with Disabilities Act (ADA), the Pregnancy Discrimination Act, the Age Discrimination in Employment Act, the Civil Rights Act, and various budget reconciliation acts such as Tax Equity and Fiscal Responsibility Act (TEFRA), Deficit Reduction Act (DEFRA), and Economic Recovery Tax Act (ERTA).
How can your organization benefit from self insurance or level funding? Are there Self-Insurance advantages of avoiding Essential Health Benefits and using the lower cost Minimum Actuarial Value in Health Care Reform?
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