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Thayer Partners Blog

The Difference between Fully Insured and Self-Funded Health Plans

[fa icon="calendar"] Jan 27, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

The_Difference_between_Fully_Insured_and_Self-Funded_Health_Plans.jpgWhen setting up group health insurance plans, employers need to choose the best plan for their business needs as well as their employees’ needs. Typically, business owners choose between the two most common options: fully insured health plans or self-funded health plans.

Below, we detail the differences between the two plans.

Fully Insured Health Plans

The traditional way to structure an employer-sponsored health plan is to use a fully insured plan. Under such a plan, the company uses an insurance carrier and pays a premium. The premium rates are fixed for a year, paid monthly, and are based on the number of employees enrolled—they only change during the year if the number of employees changes. The insurance company collects the premiums and pays for employee claims based on the benefits outlined in the policy that has been purchased. The employees, or their dependents, are responsible for paying co-payments or deductible amounts as required.

Self-Funded Health Plans

Self-funded health plans are a different way to pay for group health insurance while offering identical benefits to employees. Employers with a self-funded health plan are often described as “owning” their health plan while employers with fully insured plans “rent” the plans of health insurance companies until an employer chooses a different plan structure or a plan gets too expensive, prompting a change to another carrier. A self-funded health plan uses a third-party administrator to provide all of the services a fully insured heath plan provides (like managing all of the claims paperwork and providing participant service) and to ensure the plan complies with government regulations. For most employers, the cost of a self-funded plan is significantly lower than a fully insured plan, and it offers employees control and flexibility not available with fully insurance health plans. Employees still get a health card with a major insurance company’s name on it that is accepted at virtually every health practitioner’s office.

Self-funded health plans are attractive because they allow employers to save money—to pocket the profits that the insurance company would typically make on a fully insured plan. Employers usually save $1,000 per employee by using a self-funded plan, which can have a monumental impact on a company’s financial well-being considering health insurance is usually the second largest expense after salaries for most organizations.

Self-funded health plans consist of two main costs: fixed and variable. The fixed costs include the administrative fees, set fees charged per employee, and any stop-loss insurance premiums, which pay for costs that exceed a predetermined level of coverage. The variable costs are the healthcare claim payments. These costs will vary based on the health of your employees and their dependents.

Other than the financial benefits that employers gain through the use of self-funded health plans, they also gain insights and transparency into the claims experience of the plan (on a depersonalized basis), as well as increased power to design a plan that better meet their own needs and the needs of their employees.

Though many business owners believe that self-funding their own health and dental plan would lead to increased risks, these plans are actually covered by two layers of protection: specific and aggregate insurance. Specific insurance caps liability to a specific dollar amount per employee—any claims above that number are paid by the insurance company. Then aggregate insurance caps the company’s total liability in the unlikely event that a number of employees either hits or exceeds the specific insurance cap.

Which Plan Should You Choose?

Both plans have their benefits and drawbacks, and neither plan is best for all employers. Self-funded health plans make sense for about 70% of companies that have 25 or more employees and a healthy balance sheet and cash flow. Those employers with a particularly unhealthy employee population should choose a fully insured health plan.

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Topics: self-funded health plan

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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