Employer healthcare insurance can be a valuable addition to your employee benefits package. In an effort to reduce costs, more companies are choosing self-insurance plans to meet the healthcare coverage needs of employees. Also referred to as a self-funded plan, self-insurance can yield money-saving benefits to employers while providing employees with convenient access to healthcare. If you’re enrolled in a self-insurance plan at work or you’re a business owner who’s considering a self-funded plan, it’s important to understand how they work.
A financial advisor can give you expert advice on whether or not it makes sense to pursue self insurance.
What Is Self Insurance?
A self-insured or self-funded plan allows employers to assume most or all of the costs for health insurance benefit claims. The employer collects premiums for coverage from employees who are enrolled in the plan. When an employee files a claim for themselves or a covered dependent, the employer pays the claim in the place of the insurance company.
Self-insurance plans can be self-administered, meaning the employer assumes all responsibility for enrolling employees in the plan and processing claims. Companies can also outsource plan administration to third parties in exchange for a fee.
How Self-Funded Insurance Plans Work
Self-insured plans are a direct contrast to traditional fully insured plans. With a fully insured plan, employers pay a premium on a monthly basis to an insurance company. These premiums may be pooled together with premiums from other employers. This pool of funds is then used to pay benefit claims from employees as they’re filed.
If an employee gets sick or hurt, needs to fill a prescription or requires some other type of medical care, they can visit a doctor, hospital or other healthcare provider that’s part of their insurance plan’s network. The employee may have a co-pay that’s required at the time they receive treatment. They may also have a deductible to meet or coinsurance to pay.
Meanwhile, the healthcare provider files a claim with the insurance company for services provided. The insurance company processes the claim and pays the covered amount. The employer receives nothing as they were not responsible for processing the claims and paid nothing toward them. The employee may receive a bill for any remaining amount due not covered by their insurance. They’d be responsible for paying that amount out of pocket.
In a self-insurance plan, the employer earmarks a certain amount of money each that’s to be set aside each month for employees’ healthcare needs. This money is typically held in trust. Employees can visit doctors, pharmacies, hospitals and other healthcare providers included in their plan’s network. Those healthcare providers submit claims to the plan but it’s the employer, not the insurance company, that pays out the claim.
The insurance company can manage payments on behalf of the employer. But the insurance company itself doesn’t pay anything toward benefit claims. Any money remaining in the trust fund at the end of the year is divided between the insurance company and the employer according to a schedule established by the terms of the plan. The insurance may collect a fee for providing administrative services.
Why Companies Choose Self Insurance
Self-funded insurance plans can be attractive to employers for a number of reasons. For one thing, they aren’t subject to as many regulatory requirements as fully funded plans. That alone can be a reason to consider a self-insured plan for employers who want to save time and headaches when establishing insurance coverage for employees.
Self-insurance plans are also flexible, in that employers can work with the insurance company to decide which type of coverage and benefits to offer. It may be easier to customize a self-insured plan versus a fully funded plan, which is usually one-size-fits-all. So a self-funded plan allows employers to put the needs of employees first.
Self-funded plans can save employers money because they aren’t subject to the same taxes and fees as fully insured plans. The employer only has to pay claims as they’re filed, rather than paying an ongoing premium to the insurance company for coverage that may or may not be used. And if there’s money remaining in the pot at the end of the year, the employer can get some of it back.
Employers can also build stop-loss protection into a self-funded insurance plan. Stop-loss protection places a cap on the dollar amount of claims employers are responsible for paying. There can be stop-loss limits in place for the plan total and for individual employees as well. This protects the employer against large individual claims, which may drain accumulated funds.
Is Self-Funded Insurance Good for Employees?
Self insurance can be beneficial to employees if the plan is suitable to meet their needs. These plans essentially work the same as fully-funded plans, in terms of your ability to see doctors and other healthcare providers. What’s different is the level of coverage that’s included in the plan and how your claims are paid out.
If your employer offers a more comprehensive self-insurance plan then that could help to minimize your out-of-pocket costs for care. You might pay less for co-pays, coinsurance or deductibles. On the other hand, if an employer chooses a very basic self funded plan then you may find yourself paying more for care, especially if you have a condition that requires ongoing medical attention.
Reviewing the terms of your coverage and benefits can help with understanding what’s covered and what’s not, which doctors or healthcare providers you can visit and how much you might pay for care. Also, consider how likely you are to need to visit the doctor to estimate what you’ll pay in deductibles, co-pays or coinsurance on a yearly basis.
The Bottom Line
Self-funded insurance plans are typically better suited to larger companies that have stable cash flow and can afford to pay money in monthly to a claims trust fund. If you’re not sure what type of insurance plan your employer offers, talking to your benefits coordinator can shed some light on your coverage details. And if you’re a business owner who’s considering a self-insurance plan, it may help to talk to an insurance agent or broker to weigh the pros and cons.
Financial Planning Tips
- The term “self insurance” can also be used in discussions of financial planning. For example, you may self insure against long-term care needs by setting aside money in a trust to pay for those expenses. This can eliminate the need to purchase separate long-term care insurance or to spend down assets to qualify for Medicaid. Likewise, creating a trust to hold assets to pay for the care of a special needs dependent or to ensure that your kids can go to college if something were to happen to you is another form of self insurance.
- Consider talking to a financial advisor about the benefits of self-funded health insurance plans and whether it makes sense for you to have one. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor, get started now.
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