Employer-sponsored health insurance in which the employer (rather than the carrier) assumes financial risk, and is responsible for paying claims. Self-funding is a cost-containment strategy for employers to avoid paying high premiums of traditional health plans. Increasing numbers of employers are choosing to self-insure, with around 60% of all firms currently enrolled in a self-funded plan. Self-funding is most common among larger firms, who have more employees and dependents across whom they can spread financial risk, along with greater financial reserves to fall back on in order to cover employee claims.
In a self-funded health plan, the employer pays for each employee claim upon incurrence, rather than paying an insurance carrier a fixed premium. Usually, employers will outsource the administration of their self-funded health plan to a third-party administrator (TPA), who manage claims processing, underwriting, and other tasks for a fee. In addition, employers often purchase stop-loss coverage, which acts as financial protection by limiting the monetary liability the employer has for an employee claim.
Self-insurance has several benefits for employers. Rather than prepaying costly premiums to a carrier, employers pay as they go, for the medical services their employees actually use. This results in improved monthly cash flow, since employers have more money they can invest in other areas. In addition, instead of being confined to a “one-size fits all” policy provided by an insurance carrier, employers are free to design a benefits plan that caters to the health needs of its workforce. Self-funded firms are also exempt from state insurance laws including reserve requirements and mandated benefits, creating further flexibility in plan design.
Moreover, cost-savings are made through tax efficiency, because self-funded firms are not subject to state taxes on insurance premiums and are only responsible for paying a tax on their stop-loss coverage– resulting in an average of 90% reduction in state premium taxes. Finally, self-insured firms have access to their own insurance data that is unavailable under fully-funded health plans. Through the use of health analytics tools, this data can be harnessed to predict future claims and craft more effective self-insurance plans with reduced costs.