Self-funded vs. fully-funded health plans: What’s the difference?

When the Affordable Care Act went into effect in 2013, it started a trend in the world of employer benefits: As businesses fretted over the prospect of crippling cost increases, they began to turn to another option — self-insurance. 

In 2018, the number of private-sector businesses offering at least one self-insured plan hit 38.7 percent, up from just 26.5 percent in 1999, according to the Employee Benefit Research Institute (EBRI). Self-funded plans have long been popular among the country’s largest employers, but in recent years the option has gained favor among small-to-midsized businesses, too. From 2013 to 2016, the number of small businesses offering at least one self-insured plan rose 31 percent. Among midsized businesses, that number increased 15 percent.

So, what exactly is self-insurance? What does it bring to the table for employers? And most importantly, can it make good on its pitch to save businesses money? 

Matthew Chubb, executive director of sales at Kaiser Permanente, a national health care provider and not-for-profit health plan, spent part of his career in the self-insurance market. As he points out, there are a lot of misconceptions about self-funded plans, and it’s important for businesses to understand the full picture before making a decision. 

“More and more businesses are going self-funded,” Chubb explained. “It sounds like the greatest idea ever because they can save money. What could go wrong? But are you truly saving money and getting the most affordable health plan? That’s the question we want them to ask.” 

What are the distinctions?

In essence, a self-funded plan gives the employer skin in the game when it comes to the health benefits they provide to their employees, Chubb explained. 

The employer is the owner of the plan and pays a fixed cost for plan administration, access to a network of doctors and so-called “stop loss” insurance that helps the employer cover any unexpectedly large claims. Then the employer pays any claims as they’re incurred, Chubb explained. If an employer doesn’t have any claims — if its employees and their families are healthy all year — the company doesn’t pay anything, bringing immediate savings to an organization. 

Plus, as the owner of the self-funded plan, the employer has an open window into all its claims data. It can see everything and can build its health plan to help manage the particular needs of its employees, Chubb said. 

Fully funded plans, on the other hand, charge employers a set rate to be paid out in 12 equal installments over the course of the year. The rate is based on the demographics of its employee population and any historical claims data there is to draw on, and it’s adjusted year over year, depending on how the plan performs. 

There are no refunds in a fully funded plan, even if there are zero claims, but there is no extra cost if a company had large-scale claims. The company will likely pay for that in the form of a rate increase the following year, Chubb said. 

When it comes to transparency in that claims data, fully funded plans don’t provide a lot of insight. So the employer stays relatively in the dark as to what’s driving up costs, Chubb said. 

What are the risks involved? 

With self-insurance, the biggest risk lies in the claims, Chubb said. 

It’s an unknown year after year. During good years with little to no claims, the employer benefits. But years of high claims can present an economic burden, Chubb said. 

Businesses who choose to self-insure pay for stop-loss insurance to hedge that risk, he added. That insurance kicks in in the event of high claims and covers the cost on behalf of the business. However, the stop-loss provider can choose not to cover a company that incurs extraordinarily high claims, which leaves that business vulnerable once again. 

With fully funded plans, the risk lies in the threat of increasing rates, Chubb said. Without insight into its claims data, a company doesn’t have a window into how its rates are being calculated. That impacts budget planning. More importantly, it raises questions about wasted costs. 

What kinds of businesses choose self-insurance? 

Historically, self-insurance has been popular among large organizations with more than 500 employees, the thought being that that larger employee populations would spread the risk. But Chubb said that mentality has changed in recent years, and more small-to-midsized employers are being drawn in by the prospect of the transparency and cost savings. 

That said, the popularity appears to be waning among the smallest employers, according to data from EBRI. While the percentage of small employers offering at least one self-funded plan rose 31 percent between 2013 and 2016, it has since fallen back down to 2013 levels. 

Do businesses have to go all in on one or the other? 

In short, no. 

Chubb said another misconception about self-funded plans is that they cannot coexist alongside fully funded plans. The fear was that having self-funded and fully-funded plans side by side would ruin the risk pool — that more of the healthy population of employees would end up with the fully funded plan, leaving the employer to pay more claims out of pocket. 

But Chubb says he’s seen the opposite play out, time and time again. 

“What we’ve shown is that, over time, we end up with an unhealthier demographic than the self-funded plan, and we just do a better job managing those costs because our model focuses on preventive care, and with self-funded, there’s no true preventive model built into it.” 

That data has won over multiple large-scale employers, including a “major county” in Maryland with some 15,000 employees that recently added Kaiser Permanente as a fully funded option, alongside its self-funded plan, Chubb said. 

“It’s hard. Companies have a lot on their plate, and health care is generally their second biggest expense behind payroll,” Chubb said. “You’ve got to make the right decision for your company, and that starts with having the right information.”

 

Originally published on the Washington Business Journal.

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