Learn More About Self Funding (Frequently Asked Questions)

What is a self-funded health plan?

A self-funded (or self-insured) health plan is one in which the employer assumes some or all of the risk for providing health care benefits to their employees. The employer takes control of the assets of the plan, invests them to his advantage and eliminates the insurance company charges. Employers can completely redesign the plan to meet employee needs.

Why do employers self-fund their health plans?

There are many advantages to self-funding; the primary advantage being cost savings:

An employer does not pay full state premium taxes, which usually range from 4%-6% of the monthly insurance premium. Every state taxes insurance companies on the premiums collected. The insurance company in turn pass these costs back to the employer. In a self-funded plan, premiums are collected only on the excess loss coverage - a fraction of the regular insured premium. Therefore, premium taxes are substantially reduced.
In a self-funded plan, employers do not pay insurance company risk and retention charges. An insurance company charges several fees to insure and administer a health plan. Many of these, such as booklet printing costs or actuarial fees, must be paid no matter how the plan is funded or who administers it. However, some insurance company charges, such as risk and retention charges, are not applicable to self-funded plans. They simply do not exist in a self-funded situation.
The employer retains control over the health plan reserves, enabling maximization of interest income. When the employer decides to self-fund and all claims have been paid under the old insurance contract, the employer recaptures any reserves that are left. Usually the employer then invests this money and receives the interest income. Insurance companies traditionally credit an employer much less than the actual interest/income received from that employer's reserves. The difference between what the insurance companies credit an employer and what that employer can earn by their own investments is another advantage of self-funding.
Insurance companies are subject to state regulation. Self-funded plans are subject only to federal regulation, thereby giving an employer almost total control of the plan design. Having no premium taxes , no insurance company risk and no retention charges, results in companies having significant savings. However, it is the pre-emption of state regulation that saves the most money in self-funding.

Most states have numerous laws requiring a myriad of coverages for an insured plan written in their jurisdiction. A self-funded plan does not have to comply with these state laws. Therefore, an employer can customize his health plan design focusing on his employee's actual needs and cost savings.

Additionally, an employer can contract with amanaged care system that saves the plan the most money, not just the managed care system owned by the insurance company.

An employer does not have to pre-pay coverage, thereby improving his cash flow. Insurance premiums are due in advance. Self-funded plans pay claims as they're presented to the claims administrator, usually 60 to 90 days after medical services are received. Therefore, during the first year of self-funding, an employer pays for only 9 to 10 months of claims. This improved cash flow can be used to the employer's advantage.
An employer only pays benefits based on his employees' histories, not someone else's employees. In all but the very largest of health plans, an insurance company pools the experience of its clients. Therefore, an employer often finds that they end up paying for the poor histories of someone else's employee population. In self-funding, each employer pays only for their own employees' benefits.

With what laws must the self-funded plan comply?

The self-funded plan comes under all relevant federal laws, none of which is specifically for self-funded plans. Depending on the company's line of business and size, the federal laws applicable to health plans are ERISA, COBRA, the Americans with Disabilities Act, the Pregnancy Discrimination Act, the Age Discrimination in Employment Act, the Civil Rights Act, and various budget reconciliation acts such as TEFRA, DEFRA and ERTA. If you have questions, we will be glad to review the specifics with you.

Is self-funding for everybody?

No. The major difference between an insured plan and a self-funded one is that in self-funding the employer assumes the risk for the claims and these claims should be somewhat predictable. Therefore, if the employer is very small, self-funding is not recommended. Although there are companies as small as 25 employees that do successfully self-fund their health plans, an employer this size should consult us as to the viability of self-funding. Also, if the work force is volatile making future claims difficult to predict, self-funding may not be an option. Volatility of future claims can be smoothed out to a great extent by the purchase of excess-risk coverage. Please consult with us for more information as we are happy to share more insight and experiences.

What is excess-risk coverage?

Excess-risk coverage is insurance sold to self-funded health plans to guard against unacceptable losses. There are two types of excess risk coverage:

Specific Coverage that insures against a single catastrophic claim that exceeds a dollar limit chosen by the employer and agreed to by the excess-risk carrier. For example, specific coverage would come into play if one of the covered participants was in a catastrophic accident and had claims that exceeded the agreed upon dollar limit. In this case, the specific coverage would reimburse for all the covered expenses beyond that dollar limit.
Aggregate coverage that insures against all the claims exceeding a specific dollar limit chosen by the employer and agreed to by the excess-risk carrier. If all the claims payable exceed the agreed upon dollar limit, aggregate coverage would reimburse the excess. Excess-risk coverage protects the plan against unforeseen catastrophic claims that would cost more than is budgeted in the plan and place undue financial burdens on the employer.

Do I have to redesign my existing health plan?

No, not at all. Self-funding doesn't require a change in the existing group coverage's, unless of course the employer wants to change them. Some employers have become comfortable with certain plan designs and decide to leave the plan, as is for at least the first year of self-funding. Other employers find that the existing plan is excessively expensive because of an overly generous design and/or difficult administrative burdens. Employers redesign these plans to save money and to simplify the plan. The choice is up to the employer. We'd be glad to further discuss concerns and help with this decision.

What about payroll deductions?

Any payments made by employees for their coverage or coverage for their dependents are still handled through the employer's payroll department. However, instead of being sent to the insurance company for premiums, they are either paid directly to the administrator for claims expenses. If the funds are being used as reserves, you need to put them into a tax-free trust that's controlled by the employer.

Will my life insurance coverages be affected by self-funding my health plan?

No. Life insurance and other benefit plans are completely separate from your health plan.

Who will take the place of the insurance company to administer the plan?

A large self-funded employer can either administer the plan himself or have a third-party administrator (TPA) administer the plan. TPAs are specialized administration companies that have come into being because of the growth in the self-funding industry over the past 20 years. In 1991, TPAs administered over $5 billion of self-funded health claims - a figure that's growing every year. Only very, very large employers have the resources to self-administer. Many employers feel that insurance companies will not offer the personalized service they prefer? This leaves TPAs as the preferred choice by most self-funded employers.

Why should I self-fund my health plan?

Many employers faced with the same question have decided to implement a self-funded health plan. Their reasons include:

Self-funding will show a large first-year savings through the lack of premium taxes and various insurance company charges.
Employers can save considerable money through new plan designs that take advantage of the most up-to-date cost containment strategies.
Self-funding does not affect the plan from the employees' standpoint. There does not have to be any noticeable change in the plan, unless the employer so wishes.
The employer receives increased interest from his reserves.
Every aspect of plan administration becomes subject to competitive market pricing, thereby saving money on such items as claims administration, printing of Summary Plan Description, etc.
Excess-risk coverage is available to insure the employer against unforeseen adverse claims experience.