All group medical benefit plans fall into one of two categories: self-funded or fully insured. The choice of one over the other should not be made arbitrarily. Each type carries its own set of administrative rules and legal constraints.
What is Self-Funding?
Under an insured health benefit plan, an insurance company assumes the financial and legal risk of loss in exchange for a fixed premium paid to the carrier by the employer. Employers with self-funded (or self-insured) plans retain the risk of paying for their employees’ health care themselves, either from a trust or directly from corporate funds.
Most employers with more than 200 employees self-insure some or all of their employee health benefits. Many employers with fewer than 200 employees also self-fund, but these employers require greater stop-loss insurance protection than larger employers (stop-loss insurance is discussed in greater detail later). As a general rule, employers with fewer than 100 employees fully insure their group medical benefits.
The risk assumed in either situation is the chance that employees will become ill and require costly treatment. When employees have few claims and few expensive illnesses, the self-funded employer realizes an immediate positive impact on overall health care costs. Conversely, if the employee group has unfavorable claims experience, a self-funded employer would incur an immediate expense beyond what may have been expected. Insured plans have a more predictable cost for the year; however, large employee claims costs from one year can affect future premium amounts.
ERISA vs. State Regulation
Self-funded health plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA). ERISA preempts state insurance regulations, meaning that employers with self-funded medical benefits are not required to comply with state insurance laws that apply to medical benefit plan administrators. On the other hand, insured plans must comply with some of ERISA’s requirements, but are primarily governed by the state where covered employees reside.
The distinction between state and ERISA regulations is important when determining if self-funding is right for your organization. Multi-state companies with insured health plans must comply with the regulations of each state in which they have plans and covered employees. Multi-state self-funded plans need only comply with ERISA.
Premium vs. Unbundled Fees
The risk an insurance company takes with an insured plan can be translated into a dollar amount for the employer. That dollar amount is the premium an employer pays each month for the insured group medical benefits. The premium amount includes the following:
Current and predicted claims cost
Premium tax paid to the state
Insurance company profit