Pros and Cons of Self-Funded vs Fully Insured Benefits
A choice between predictability and flexibility
Offering health insurance benefits is one way to attract great talent to your business and maintain a healthy workforce. However, what’s rarely discussed is the different ways that companies can finance these benefits.
Most employers opt for the traditional model, known as fully insured plans, but this isn’t always the best choice for small and medium-sized businesses. As a result, self-funded benefits are gaining popularity among employers who want coverage that aligns with their budget and workforce needs.
Below, we’ll reveal exactly what self-funded and fully insured benefits are and the pros and cons of each.
What are fully-insured benefits?
If you’re looking for the status quo, fully insured benefits are the way to go. With fully insured plans, employers purchase health insurance from an insurance provider or benefits broker. Employers and/or their employees pay a per-employee premium typically based on a business's employee population characteristics, healthcare use and other factors. However, this also depends on how big your company is.
Fixed premium rates allow predictability
If you have 100 or more employees, insurers develop a fixed amount by assessing the claims incurred during the plan year and predicting the expected inflation and trend increases. Yet, those with less than 100 employees are often community-rated, meaning the insurer assesses other small businesses in the demographic to determine an amount.
The latter could be problematic, as they focus on limited factors like age rather than the individual medical history of your employees. Therefore, if your employee population is healthy, you won’t be quoted on that. You’ll be quoted based on other small businesses with similar demographics, like age and sex, - who may have a less healthy population.
Employers have less financial risk
In either scenario, the insurance company takes on the financial risk of providing coverage for insured events and managing the plan. As an employer, this type of approach allows you to set it and forget it, which is beneficial. After all, you likely have a ton of other things on your plate.
Insurers control plan design
However, it also means you’re limited by the insurer's plan options and are subject to state insurance regulations. In addition, your premiums will change as the demographics of your employee group or the small businesses around you change. So, it could get expensive. Just consider how the average annual premium was $22,463 for a family in 2022 — a 20% increase from 2017.
Pros of fully insured health plans
Some of the key benefits to choosing fully insured benefits are:
Minimal administrative work for the employer since the insurance provider is managing the plan
Easier transition when mergers/acquisitions occur
Predictable monthly costs so employers can plan for the year
Insurance provider is responsible for incurred but not reported claims if the plan is terminated
Less risk and volatility in claims expenses
Cons of fully insured health plans
A few of the cons associated with a fully insured health plan include:
Little control over plan design
If claims are lower than anticipated, the employer doesn’t receive any money back
Employer has to comply with state regulations and mandates
May be subject to greater expenses (e.g., taxes)
Lack of transparency regarding plan cost
What are self-funded benefits?
With self-funded benefits, an employer provides health benefits directly to their employees and acts as their own insurer. As the policyholder and employer, you have more control over plan design and have greater flexibility, but you’re also responsible for all the medical claims that arise. High-cost claims could financially hinder a business, but employers can obtain stop-loss insurance to mitigate this risk. Stop-loss insurance will reimburse an employer’s health plan for claims above a set limit.
Employers have greater flexibility
Businesses utilizing self-funded benefit plans might also contract with a third-party administrator or TPA. TPAs assist with managing stop-loss insurance, generating customized reports, setting up group plans, coordinating provider network contracts and other administrative tasks. Employers could self-administer, but it’s best to outsource this task if processing claims and more are not in your wheelhouse.
Stop-loss insurance and third-party administrators are usually fixed monthly expenses, so employers know what to expect. However, the cost of your monthly claims may be inconsistent since you’re paying for whatever claims came about during that time frame. Nonetheless, this approach may still be better than paying for pre-determined premiums since you’re only paying for claims that are actually used.
More risk requires more cash flow
Employers providing self-funded benefits need consistent cash flow since some expenses aren’t predictable. Therefore, setting money aside to pay incurred claims is wise since you’re assuming more risk. If some money happens to be left at the end of the year, it can be used for other business needs.
According to KFF, large employers are more likely to cover workers using self-funded plans than small firms. Interestingly, many larger companies offer multiple self-funded plans to different categories of workers, as some may require more care than others (e.g., those who need chronic care management).
Telehealth may reduce costs for employees and employers
You can also add telehealth services to help potentially lower out-of-pocket expenses for your employees and cut overall healthcare expenses for you. Thanks to their customizability, self-funded plans allow you to incentivize your employees with low co-pays if they use telehealth services when appropriate instead of costly urgent care visits or emergency rooms.
Pros of self-funded insurance
A few of the main benefits of choosing these employer funded benefits are:
Employers have more freedom over plan design
Governed by ERISA, so state regulations often don’t apply
Greater access to claims data, which allows employers to identify trends and make adjustments based on risks and finances
Fixed costs may be lower
May receive a refund if there are fewer claims than expected
Cons of self-funded health insurance
Some of the disadvantages of utilizing a self-funded plan are:
Employer assumes the risk
May have to comply with HIPAA regulations
Employer has to keep reserves for incurred but not reported (IBNR) claims if the plan is terminated
There is more work involved for employers, even when they outsource to TPAs
Variable monthly cash flow
Select the best health plan option for your needs
Which health insurance plan might be best for you? Ultimately, that’s for you to decide. Typically, fully insured plans are best for those who prefer predictability and less administrative burden. However, self-funded benefits are ideal for employers who desire customizability and flexibility. Nonetheless, both help you take care of your workforce.
Speaking of caring for your workforce, have you considered adding telehealth services to your benefits package?
OpenLoop offers tailored telehealth benefit plans for companies that want to create an a la carte, fully branded benefits package that aligns with your member’s needs. By partnering with us, you gain access to our vast nationwide provider and payer networks and white-label technology built to scale with your organization.
Want to learn more? Contact us today!
Our full suite of white-labeled virtual care services includes: