How Health Plan Self-Funding Works for Employers

For employers, a direct partnership plan can provide an effective and affordable alternative to the traditional employee benefits model. Simply put, employers contract directly with community providers to provide healthcare for employees and their families.

However, to take advantage of this model, employers need a self-funded plan. Don’t worry – it’s not as scary, or as risky, as you might think.

What Is Self-Funding?

A traditional health insurance plan is fully-funded. When you offer a carrier’s health plan, it’s fully-funded: You pay the premium and they pay the claims.

Self-funding is an alternative model. Instead of buying insurance from a carrier, the employer allocates funds to cover claims directly. Then, the employer contracts a third-party administrator to manage claims and adds a layer of stop-loss coverage to control risk in the event of catastrophic claims. Below are a few key differences:

Self-Funded Plan	Fully Funded Plan
The employer is the payer. This means the employer pays the claims.	The carrier is the payer. This means the carrier pays the claims.
The employer pays for services, such as a third-party administrator, to help administer the plan.	The employer pays premiums to purchase the plan. The carrier sets the premiums and can hike them from year to year.
The employer uses stop-loss coverage for catastrophic claims, through a captive and/or reinsurer.	The carrier is responsible for catastrophic claims but will likely pass these costs onto the employer at the next renewal.
The employer designs the plan, balancing cost control with employee needs.	The carrier designs the plan, and may be motivated by shareholder profit.
When the employer succeeds in controlling costs, the employer saves money.	When the carrier keeps costs down, the carrier saves money.

Isn’t Health Insurance Self-Funding Just for Large Employers?

Most large employers use self-funding. This should tell you something about the appeal. If Fortune 500 companies know that self-funding is the better option, other companies should be take note. With H2B, mid-sized companies with at least 20 employees are also able to take advantage of self-funding options.

How Does Self-Funding Work with a Direct Plan?

In a direct plan, employers contract directly with the healthcare systems and providers in their community. This direct approach bypasses insurance carriers to gain direct access to high-quality, affordable care.

There are four critical parts of a direct plan:

Access: The employer works directly with local health systems and providers to secure access to health services.
Prescriptions: A pharmacy benefits manager handles prescription drug coverage.
Stoploss: A captive and/or reinsurer provides coverage for catastrophic claims.
Administration: A third-party administrator handles claims.

Overcoming Barriers to Self-Funding

Making the switch from a fully-funded plan to a self-funded plan can seem intimidating for two main reasons: the legwork and the risk. However, both of these concerns can be overcome.

Managing a self-funded plan does require a few extra steps. However, so does offering a fully-funded plan. There is a steep learning curve when you first switch to the self-funded model because you are learning a totally new approach to health coverage. Once you’re up and running, you’ll find that it’s not necessarily more work; it’s just different work. Service providers, such as third-party administrators, will handle many of the tasks required, so the burden on your internal resources will be minimal.
Risk can be controlled in a self-funded plan. Insurance carriers purchase reinsurance to cover catastrophic losses. Self-funded employers can also leverage reinsurance and stop-loss coverage for catastrophic losses. This can be done by purchasing stop-loss coverage or by joining a stop-loss group captive. These measures limit the employer’s risk, so their costs fall into a predicable range. At the same time, self-funded employers have access to the insights they need to implement effective cost control measures.

What Is Self-Funding Like from the Employee Perspective?

Most of the differences between a self-funded plan and a traditional fully-funded plan take place behind the curtain. For the employees and their family members who use the plan, the experience may not seem much different – except that it may be a lot less expensive. Employees are still responsible for paying their out-of-pocket costs, such as a deductible and any coinsurance or copay.

However, this doesn’t mean employees won’t notice anything different. Employers can leverage self-funding to keep costs down, and they can design plans that meet the needs of their workers. This results in more affordable care with benefits that employees want.

In a self-funded direct plan, employees receive tiered coverage. When employees receive care from the employer’s direct partner providers, they pay one cost. When they receive care from another provider, they pay a higher cost. This plan design steers them toward the affordable, high-quality direct partner providers. This is similar to how many carriers use networks with different costs for in-network versus out-of-network care.

The Main Difference Is Control

A fully-funded plan may sound easier. That’s because you’re relinquishing control over your health coverage to a carrier. The carrier handles plan design and claims, and you just pay what you’re told. That’s pretty easy – but at what cost?

When you switch to self-funding, you’re taking on fiduciary responsibility. You have a duty to pay claims and manage costs effectively. To do this, you need to engage with your community health system and build sustainable, transparent relationships that are mutually beneficial.

When you take control of your health coverage, you gain the ability to: