What Is a Self-funded Health Care Plan?

6 minutes read

As the Great Resignation continues, employers are seeking fresh ways to enhance their employee benefit plans—especially health care, the crown jewel of every employee benefits portfolio. This is driving new interest in self-funded health care plans, an alternative to traditional, fully insured plans.  

What is a self-funded health care plan exactly? Under this arrangement, the employer assumes the risk and responsibility of providing health benefits to its employees rather than securing coverage through a traditional group health insurance policy. The employer collects employee premium contributions, maintains cash reserves and pays employees’ claims out-of-pocket as they’re incurred.  

While some employers administer their own plans, many rely on third-party administrators, also known as TPAs, to perform these functions. From the employees’ perspective, a self-funded health care plan may not look or feel much different than a fully insured one, but for many employers, there are significant advantages—and some deterrents.  

Pros and Cons of Self-funded Health Care Plans

There are three key advantages to self-funded health care plans: 

  • The Potential for Cost-savings 

Last year, the top reason employers switched to self-funding was frustration over yearly premium increases. Because employers with self-funded health plans collect employee premiums and maintain their own reserves, they—not health insurers—earn interest on those funds. Better yet, in the event that annual claims are lower than expected, the employer pockets the surplus.

Furthermore, self-funded plans are exempt from state health insurance premium taxes, which typically amounts to 2% to 3% of premiums, offering another opportunity for savings.  

  • Increased Flexibility

Self-funding allows employers to create customized health care plans rather than choose an insurer’s cookie-cutter plan. Employers can choose their managed care networks or vendors, rather than be forced to use the insurer’s choice. And because employers have direct access to their claims data, they can gain a greater understanding of—and control over—the factors driving their costs. 

  • Less Regulation 

Self-funded health care plans are regulated under federal Employee Retirement Income Security Act (ERISA) statutes. As such, they aren’t subject to state health insurance mandates as well as some Affordable Care Act (ACA) mandates, giving employers greater control over their benefits.  

That said, self-funding is not for everyone. Although most self-funded employers purchase stop-loss insurance, which limits their claims exposure, for many employers—particularly smaller companies and those with an older or less healthy workforce—the potential financial risk is simply too daunting.

Enhancing Health Care Benefits—and Their Administration

According to the 2022 Society for Human Resource Management (SHRM) Employee Benefits Survey, 26% of HR professionals report that their employers self-fund their health plans. However, that number may soon increase.

In order to attract and attain talented workers in today’s job environment, many employers are open to updating their employee benefits. Self-funded plans offer them greater opportunity to customize their health care benefits while potentially saving money. 

In addition to offering more competitive benefits, employers should consider improving benefits administration while offering employees a smoother, more transparent experience. That might include enhancing communications, simplifying enrollment and embracing HR technologies that help accomplish those objectives.

At the end of the day, your employees may not care if their health care plan is self-funded or insured, but they will care—profoundly—about the range and quality of their benefits, how easy it is to understand them and how adeptly they are administered. Taking pains with your health care plan is a way to show employees you care—and that is the key to winning their hearts.

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