Fully Insured or Self-Insured Medical Plans: Which Is Right for You?

June 7, 2023June 28, 2023 alopez Employee Benefits Self Insured

Fully Insured or Self-Insured Medical Plans: Which Is Right for You?

Controlling health care costs is a top priority for employers of any size.

• PwC Health Research Institute reported that employer health spending accounted for 12% of total wages.
• According to the Center for Medicare and Medicaid Services Office of the Actuary, national health care spending will be 20% of the total U.S. economy by 2026.

These costs are the direct result of:

• Increased drug spending: Drugs designed to treat specific ailments are expensive but can deliver big results (such as curing hepatitis C).
• Government regulation: State health care mandates and the ongoing battle over the Affordable Care Act have created instability in the market.
• Innovation in the health care sector: Technology developments offer improved results with shorter treatment periods, but at a much higher cost than more traditional forms of care.

At the same time, health plans are adding programs to manage care and improve access to providers. Cost-sharing models like high-deductible health plans, health reimbursement accounts and reference-based pricing have all become more accessible. Employers have so many options, it can be hard to choose the right plan.

But one thing hasn’t changed. You still need to determine how to fund your plan. Fully insured and self-insured plans can both offer your employees complete medical coverage. However, the funding mechanisms of the two vary greatly.

Fully insured health plan

Fully insured health plans are the more traditional of the two options. You pay a premium to the insurance carrier and the insurance carrier pays claims based on the benefits of the plan.

What is covered

Fully insured plans cover claims for benefits included in the policy’s contract. They also cover any amount over the annual out-of-pocket maximum.

However, when it comes to plan designs, fully insured plans aren’t as flexible due to a limited number of predetermined plans. Vendors for prescription drugs and other services such as durable medical equipment and chiropractic care are also selected by the carrier.

How your premium is determined

Premiums for fully insured plans are determined by adding anticipated claims costs, administrative fees, applicable taxes and stop-loss coverage. These premiums are set for a specific amount of time, typically a 12-month period, and there are no additional variable costs. The size of the group also has an effect on premiums.

• Small group (less than 50 employees) premiums are “community rated.” All groups with fewer than 50 employees in the same geographic area pay the same premium.
• Mid-size group (50 to 100 employees) premiums are based on several factors, including the age of employees and dependents, type of coverage offered, previous claims data, etc.
• Large group (100+ employees) premiums are also based on claims history, size of the group, age of employees, number of dependents covered, etc.

What happens when you renew your plan

The insurance carrier must make enough money each year in premiums to cover the cost of the claims. If the carrier determines that medical costs are exceeding the premiums collected, you will see an increase in premiums. You have no control over these increases and often do not receive detailed information as to the reasoning behind the increase.

• Small group increases are based on the “pooled risk” of all individuals enrolled in the same plan, which means there is no consideration of the health of a group. Your group may be healthy and have very few claims, but another group may be much sicker and disproportionately contributing to the increase in claims. Those differences won’t be reflected in your pricing, however, as all groups will be charged the same increase.
• Mid-size group increases also consider the pooled risk but will take into consideration the group’s overall health. If your group is healthy and has what the carrier determines to be average or below average use of the plan, you could see more stable rates with limited increases.
• Large group increases consider pooled risk as well as the cost of claims for your group. The carrier will evaluate all health and prescription drug claims, pointing out high-dollar claims and the overall cost of your plan. Some groups with below-average use may receive decreases in premium while groups with high-dollar claims will see increases.

Carriers will also evaluate plan designs each year and make changes. This may include increases to deductibles, coinsurance, copayments and out-of-pocket maximums. A fully insured group will need to determine whether the current plan design is still working for employees or whether a new plan will need to be selected.

Plan design changes can affect premiums as well. A richer plan with lower out-of-pocket maximums and copays may increase premiums, while implementing a plan with higher deductibles could save you money.

Self-insured health plan

Self-insured health plans allow you to collect premiums from employees and fund claims directly, acting as your own insurer and essentially paying providers directly.

These types of plans are most common among large employers. Reports have shown that approximately two-thirds of the U.S. population enrolled in an employer-sponsored plan is covered under a self-insured plan.

However, as health care costs continue to increase, small employers are taking on the risk of self-insured plans, opting for level funding options and stop-loss arrangements designed specifically for groups with fewer than 100 employees.

What is covered

Self-insured plans are flexible in their design. Benefits can be customized by the group but must follow the Employee Retirement Income Security Act (ERISA), a sweeping federal law that ensures employees are offered certain benefits, such as continuation of coverage when they terminate their employment.

Often, groups hire a third-party administrator (TPA) to help them analyze and manage the plan. This can include setting and collecting premiums, creating an effective plan design, paying claims and managing stop-loss.

Because employers want to limit claims costs, many self-insured plans also include wellness benefits such as programs to quit smoking, encourage weight loss and manage chronic illness.

How your premium is determined

The first two things to consider when you decide to fund your own claims are current plan design and claims costs. A complete analysis will help determine the correct premium.

You will also need to evaluate your fixed costs versus variable costs.

• Fixed costs include administrative fees, stop-loss coverage and any other set fees charged per employee.
• Variable costs include health care claims.

What happens when you renew your plan

Self-insured plans don’t technically “renew” every 12 months, but there is an evaluation of the plan to make sure it’s meeting expectations; costs are adjusted as needed. Here are a few factors that can affect premiums.

• Claims: As you are funding your own claims, it’s important to calculate the amount of premium collected versus your costs. If you have had an increase in claims costs, premiums will need to increase. If you saw a decrease in claims costs, premiums may be adjusted. However, it is important to continue to build a reserve to cover unexpected expenses.
• Provider network: The plan contracts with a provider network each year to offer employees access to providers. You will need to evaluate whether the current network is sufficient. If changes are made, premiums may be affected.
• Stop-loss coverage: Typically, self-insured plans do not assume 100% of the risk for high-dollar or catastrophic claims. You will buy stop-loss insurance to cover these unexpected expenses. At renewal, you will examine claims from the previous 12 months to determine whether the stop-loss amount must be increased. At the same time, rates will be set by the carrier to cover unexpected losses and allow for changes in your employee population.

Which type of plan is right for you?

The two plans manage your financial risk very differently.

With a fully insured plan, the risk is placed almost completely with the insurance carrier. Self-insured plans cover their own risk through premium payments and stop-loss insurance. It’s important to consider the pros and cons of each plan.

Pros and cons of fully insured plans

Fully insured plans are more traditional and are often favored by small employers that may not have the financing and staff to manage a self-insured plan.

• Pros
  • There are no variable costs.
  • Fixed costs are defined by the carrier.
  • Mid-size and large groups may be able to negotiate lower rates.
  • The premium you pay at the beginning of the year will not change until renewal.
  • Health carrier assumes all financial risk.
     
• Cons
  • Premium costs can be high.
  • Plan design is predetermined.
  • Renewals can be unpredictable and are fully dependent on the carrier.
  • Employers must rely on the carrier to manage the plan appropriately.
  • Reporting capabilities are minimal.
  • Employers may have higher tax obligations.

Pros and cons of self-insured plans

Self-insured plans offer more flexibility and control over benefit offerings and management of the plan. These types of plans often work well for large companies with the cash flow to support the payment of claims.

• Pros
  • Groups pay only for claims incurred by their employees.
  • Stop-loss coverage protects groups from assuming full financial risk.
  • Groups have more control over plan design and may monitor utilization.
  • Reporting is readily available; groups can obtain specific claims reports and understand how their money is being spent.
  • Operating costs may be lower.
  • Groups are exempt from state-mandated benefits.
• Cons
  • The financial risk is high.
  • Groups are responsible for all aspects of the plan.
  • Costs to administer the plan can be expensive.
  • Unexpected, catastrophic claims can increase stop-loss coverage costs and may make the plan unaffordable to the group and employees.
  • Higher-than-average claims may make it harder for mid-size and large groups to return to a fully insured plan at a later date.

Making the decision

Regardless of which type of plan you are considering, you will need to study how employees have used benefit plans in the past, gauge the health of covered employees and evaluate cash flow. In addition, you may want to consider:

• How many employees do you have?
• How many dependents will be covered?
• What is your tolerance for financial risk?
• Can you withstand premium variations year over year?
• How much input do you want to have into plan design?
• Are you looking for a long- or short-term health care solution?

There is no right or wrong answer. You need to make the decision based on what’s best for your employees and the company as a whole.

For many small employers, the cost of health care coverage is second only to payroll costs. For large employers with more cash flow, health care is a concern because of the unpredictability of cost increases.

Regardless of the funding arrangement you choose, you must balance the financial risk with what you want to offer employees. Talk to your broker or TPA. They can help you evaluate the options available and decide what’s right for you.

This content is for informational purposes only and not for the purpose of providing professional, financial, medical or legal advice. You should contact your licensed professional to obtain advice with respect to any particular issue or problem.