The Difference Between Fully-Insured vs. Self-Insured Health Plans

Businesses typically choose between fully insured and self-insured (self-funded) plans when evaluating health benefit options. Understanding the difference between self-funded and fully insured plans is crucial for effective health insurance strategy planning. 

Overview of Fully-Insured vs Self-Funded Health Plans

What is a Fully Insured Health Plan?

In a fully insured plan, the company pays fixed premiums to an insurance carrier, which handles all healthcare claims. The premiums are determined based on employee count, projected healthcare costs, and benefit levels. This model offers predictable costs and minimal management duties, making it attractive to smaller businesses that favor stability and a hands-off approach.

In 2019, 61% of U.S. workers with employer-sponsored health insurance were enrolled in a self-funded plan, indicating a significant shift towards self-insurance among American companies.

Self-Funded vs Fully Insured Insurance

In contrast, self-insured plans involve employers setting aside funds to pay for employee medical claims directly, offering potential cost savings by avoiding insurer profit margins. This model also allows for greater benefits customization to meet specific needs and goals, providing more control over the plan.

Fully Funded vs Self-Funded Insurance

Deciding between fully funded and self-funded insurance hinges on a company’s financial stability, risk tolerance, and administrative capabilities. While fully insured plans are less risky and simpler to manage, self-insured plans can offer significant cost savings and flexibility but come with greater financial variability and management complexity.

More information about small business health insurance plans: 

Health insurance for small business

Guide to small business health insurance 

What Are Fully-Insured Health Plans?

Fully insured health plans are a traditional model where businesses pay fixed premiums to an insurance provider, assuming all risks and responsibilities for employee healthcare claims. This model is favored by small to medium-sized businesses seeking financial predictability and ease of benefits management. In a fully insured plan, the employer signs a contract with an insurer that agrees to cover all eligible healthcare claims for a set premium. These premiums are calculated monthly based on the number of employees, their risk profiles, and desired coverage levels. Insurers use actuarial data to estimate expected claims and adjust premiums to cover these costs plus a profit margin.

Pros and Cons of Fully-Insured Plans

Pros:

• Predictability of Costs: Employers can know exactly what they will owe each month, regardless of their employees' actual health care costs. This makes budgeting easier and reduces financial uncertainty.
• Ease of Administration: Because the insurance company handles all claims processing and benefits administration, the employer's administrative burden is significantly reduced.
• Reduced Risk: The insurance company assumes all risks related to health care claims, protecting employers from the financial impact of high or unexpected claims.

Cons:

• Higher Cost in the Long Term: Premiums include the insurance company's overhead and profit margins, making fully insured plans more expensive over time compared to self-funded plans, where employers might save money in years of lower-than-expected claims.
• Less Flexibility: Employers cannot customize plan options and benefits, as they must choose from the plans the insurance company offers.
• Potential for Premium Increases: Premiums can increase at renewal each year based on overall claim trends within the insured pool, age demographics, and other factors, leading to potential unpredictability in long-term healthcare budgeting.

Understanding Self-Funded Health Plans

As of 2020, 80% of covered workers in larger companies (over 5000 employees) were enrolled in self-funded health plans, demonstrating the scalability and appeal of self-insurance in substantial enterprises.

Self-insured health plans offer an alternative approach where employers assume the financial risk for providing employee health benefits, often favored by larger organizations seeking greater control over plan design and costs. 

In this model, rather than paying fixed premiums to an insurance company, employers allocate a pool of funds to cover employee health claims directly. They commonly work with a third-party administrator (TPA) to manage claims processing and benefits administration. This setup allows employers to pay for claims as they occur, potentially yielding significant cost savings when claims are lower than anticipated.

Pros and Cons of Self-Funded Plans

Pros:

• Cost Savings: If the health claims are lower than expected, the employer can save significant money, as they are not paying a premium that includes margins for an insurance company’s overhead and profit.
• Flexibility and Customization: Employers can design and adjust the plan according to their needs and preferences. This includes choosing which benefits to offer and structuring copays, deductibles, and other plan features.
• Improved Cash Flow: Since premiums are not paid upfront to an insurance company, employers can retain more cash in the business until it is needed to pay claims. This can improve overall cash flow management.

Cons:

• Financial Risk: The major downside of self-insuring is the potential for high costs from unexpected claims. If claims are higher than anticipated, the employer must cover these costs, which can be financially challenging.
• Administrative Burden: Although third-party administrators can help, employers still face an increased administrative burden in managing the health plan, negotiating with providers, and ensuring compliance with relevant laws and regulations.
• Stop-Loss Insurance Needed: Most self-insured plans purchase stop-loss insurance, which can be a significant expense. This insurance reimburses the employer for claims that exceed a certain dollar threshold to mitigate the risk of very high claims. 

While self-funded plans offer greater flexibility and potential cost savings, with average monthly premiums reported at $697 for individuals and $2,004 for families in 2020, they require robust risk management strategies, as evidenced by 79% of private sector establishments with such plans having a stop-loss policy.

Comparing Fully-Insured and Self-Insured Plans

The decision between fully insured and self-insured health plans significantly affects a company's finances, risk management, and benefits design. Understanding the difference between self-funded and fully insured plans is vital to align with a company’s goals.

Cost Implications and Savings Potential

Fully insured plans involve fixed premiums, which may result in higher long-term costs due to the inclusion of the insurer's overhead and profit. Conversely, self-insured plans allow companies to reduce costs by eliminating these overheads, although savings depend on actual claim costs, which can be unpredictable.

Risk Management and Liability

In fully insured plans, the insurer manages all claim risks, offering predictability at the cost of higher premiums. In self-insured plans, the employer bears the claims risk, which might lead to substantial financial exposure but can be mitigated by purchasing stop-loss insurance to cover catastrophic claims.

Flexibility and Customization Options

Self-insured plans offer greater flexibility, allowing employers to customize benefits to meet specific workforce needs, including tailored deductibles and copays. Fully insured plans provide less customization, as employers must select from preset options offered by insurers.

Regulatory and Compliance Considerations

Navigating health insurance regulations is essential for maintaining compliant and effective health plans. Understanding the impact of these regulations on different types of plans helps employers make informed decisions.

ERISA and State Regulations

The Employee Retirement Income Security Act (ERISA) sets federal standards for most private industry health plans, applying to both fully insured and self-insured plans. Fully insured plans must also adhere to state insurance laws, which vary by state and influence claims processing and mandated benefits. Conversely, self-insured plans are generally exempt from state insurance regulations under ERISA, offering greater flexibility but requiring strict compliance with federal standards.

Compliance Requirements for Self-Insured Plans

Self-insured plans must comply with several federal regulations, including specific provisions of the Affordable Care Act (ACA), HIPAA privacy rules, and the Mental Health Parity and Addiction Equity Act. These plans must avoid health-based discrimination, provide adequate coverage, and fulfill reporting and disclosure requirements. Effective management of these requirements typically requires either an adept in-house legal team or a partnership with a knowledgeable third-party administrator (TPA).

Important Considerations For Managing Plans

When choosing between self-funded and fully insured health plans, it's crucial to understand the management responsibilities each entails. Self-funded plans offer the flexibility to design and manage health benefits tailored to specific business and employee needs, but this comes with ensuring efficient operation and compliance. Most self-funded plans utilize a Third-Party Administrator (TPA) to handle administrative tasks like claims processing and regulatory compliance, which reduces the administrative load but may limit customization and control over plan operations.

In contrast, fully insured plans provide less flexibility but increase ease of management as the insurance carrier handles most administrative tasks and assumes risk. This arrangement suits businesses looking for simplicity and less direct involvement in plan management.

It may be worth noting that, in 2020, 39% of firms with multiple locations opted for at least one self-funded plan, compared to 28% of single-location firms. This highlights the administrative considerations and the need for experienced third-party administrators (TPAs) to manage these plans effectively.

Making the Decision: Which Is Right For Your Business?

Choosing between fully insured and self-insured health plans is a critical decision that affects your business's finances, risk management, and employee satisfaction. Understanding the difference between self-funded and fully insured plans is essential for informed decision-making.

Key Factors to Consider:

1. Financial Stability and Cash Flow: Self-insured plans may offer cost savings but require a stable cash flow to manage high-cost claims, whereas fully insured plans provide a predictable cost model with fixed premiums, with the insurer bearing the risk of high claims.
2. Employee Demographics and Healthcare Needs: Younger, healthier employee groups may see more economic benefits from self-funded plans due to fewer health claims, while a diverse or older workforce may find the risk-sharing and stability of fully insured plans more beneficial.
3. Administrative Capacity: Self-insured plans demand significant management for compliance, claims processing, and overall plan administration. Fully insured plans reduce this burden by offloading management to the insurer.
4. Risk Tolerance: Fully insured plans offer peace of mind with fixed premiums but may come at a higher cost. Conversely, self-insured plans pose more financial risk due to the potential for unexpectedly high claims.
5. Regulatory Considerations: Self-funded plans are predominantly governed by federal laws like ERISA, whereas fully insured plans are subject to state regulations, which can vary and include additional mandates.

Balancing these considerations with each plan type's potential benefits and challenges is crucial. The right choice depends on your company's specific circumstances, including financial health, employee needs, and long-term business strategies. Evaluating these factors will help determine your business's most suitable health insurance option.