Fully Insured or Self-Funded? The Health Plan Options Available to Employers

There are two major methods by which companies provide health coverage for their workers – fully insured health plans and self funded health plans. Each kind of plan has advantages and disadvantages, and employers are careful to select the best insurance options for their employees. These choices impact the 61.9 percent of Americans who receive health insurance from their employers.

In a fully insured insurance plan, the business pays a set monthly premium to a health insurance provider, which then pays out claims to the business’s workers according to the terms of coverage established by the policy contract. Plans may cover everything from regular medical examinations to surgical procedures and anesthesia services. The set premium limits the business’s exposure to the varying health needs of its workers. The firm will pay the same amount to insure its employees, irrespective of the cost of the health services they utilize. The premium and form of coverage is the same for every worker, however, making it challenging for employees to tailor their plans to their individual health needs. These programs are preferred by small businesses, which cannot afford the risk of paying for their workers’ healthcare expenses themselves. In 2008, 88% of workers employed by companies with fewer than 200 employees were covered by fully insured health plans.

In self-funded insurance plans the employer acts as the health insurer, paying for its employees’ health costs directly, often using money saved in a tax-exempt health trust. By eliminating the insurance company from the transaction, the employer can reduce costs by the amount that the health insurance company would have profited by providing a similar fully insured plan. Dean Hatfield, health practice leader at a prominent New York consulting firm, estimates that businesses can save between 2 and 3.5% on health care costs by insuring their employees directly. Self-funded programs also enable employees to customize their insurance plans, instead of using a single company-wide policy. Self-funded plans have several disadvantages, however. The employer stands to bear significant financial losses if many of its employees suffer accidents requiring medical care at once. Additionally, companies must pay high overhead fees to manage their healthcare programs. Businesses have found ways to diminish these costs. Most firms with self-funded plans buy stop-loss insurance to reduce the risk of having to pay out more benefits than expected. For example, if an unexpectedly large number of a firm’s employees require peri-operative services in a single year, stop-loss insurance will cover fees in excess of what the employer can afford during that time. Firms can also subcontract the management of their insurance programs out to Third Party Administrators (TPAs) in order to cut overhead costs. Self-funded plans are favored by large companies, which, because they insure hundreds of workers at once, are less exposed to short-term variations in the healthcare needs of their employees. 89% of workers employed by firms with more than 5000 employees were covered by self-funded health plans in 2008. In recent decades self-funded insurance programs have become more popular, but for many businesses fully-insured plans remain the best choice.

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