What is self-funded insurance?

 

Self-funded insurance is also called “self-insurance.” This is how it works:

 

·         Self-funding takes the place of an employer paying an insurance company to pay out insurance claims.

·         Under a self-funded plan, the employer assumes part of the risk, similar to a “deductible,” but is protected from excessive loss. The employer contributes into a trust fund, which is strictly protected by federal regulations.

·         Benefits and expenses are paid out by the trust.

·         If claims do not reach maximum levels, then unspent funds are carried over for future expenses. Building a reserve is a key element to a self-funded plan.

 

Self-funded insurance provides protection for employers. Here’s how:

 

·         In order to avoid catastrophic losses, self-funded plans usually buy re-insurance. It’s called “stop-loss” insurance and allows an employer to set in advance the maximum loss levels it is willing to sustain on any specific situation or on the aggregate of claims on the whole employee group. This coverage cap works to protect from unexpectedly high claims.

·         Employers also elect to save premium costs by going without a coverage cap. This requires using the savings or other funding to build a budget reserve to cover unexpectedly high claims.

 

Who uses self-funding?

 

·         About 85 percent of employer health plans currently use some form of self-funding, according to the Society of Professional Benefit Administrators. Thus, it is the dominant funding method used by employers.

 

Advantages to self-funded plans:

 

·         Self-funded plans are cost efficient due to lower administrative expenses and taxes.

·         Plans are more flexible and are individually designed to meet an employer’s needs.

·         They are less susceptible to abuse.

·         They can provide multi-state coverage.

·         The employer manages claim reserves until they are needed. The employer also manages risks.

·         The plans provide greater program control and more cost effective claims handling.

·         They provide a return on investments for employers.

 

Source: Society of Professional Benefit Administrators