Self-Insured vs. Fully Insured: Which Health Plan Is Right for Your Business?

Healthcare costs and the unpredictability of healthcare claims are top concerns of many business leaders. Employers are re-evaluating how they sponsor, structure and deliver health benefits to their employees. Future transformation is not a matter of if or even when, but how.

For many employers, this how typically includes a shift away from fully insured plans that transfer the risk to an insurance company and toward a self-funded plan where the employer retains a certain amount of risk. Self-funded health plans are exempt from state insurance mandates and certain requirements of the Affordable Care Act (ACA). This translates to savings along with added flexibility and freedom to customize plan features. Savings can be substantial on premium taxes, ACA fees and other plan costs. This change can be made without affecting the current benefits in place today. 

What Is a Self-Funded Health Plan?

A self-funded group health plan is a plan for which the employer assumes the financial risk for providing healthcare benefits to its employees. In practice, self-funded employers pay for each out-of-pocket claim as they occur instead of paying a fixed premium to an insurance carrier. A self-funded employer will typically set up a special fund to earmark money, consisting of corporate and employee contributions, to pay claims.

Figure 1: Fully Insured vs. Self-funded Health Plans

With rising healthcare costs and ACA fees for fully insured plans, self-funded plans are gaining popularity among businesses with 200 or more employees. Additionally, the self-funded marketplace has evolved to serve all employer sizes better. Properly designed, a self-funded plan can help businesses optimize their healthcare costs, ensure better control over premiums and incurred claims and create an acceptable risk for the employer. Having a trusted consultant like Aon can help organizations understand the total cost impact when considering a shift from fully insured to self-insured. We can also measure member impact in terms of network, benefits and overall employee perception.

But moving to a self-funded plan isn’t a decision to make lightly. Understanding the short- and long-term goals you’re aiming for with this approach will be imperative. It’s also important to fully evaluate your claims data, consider your tolerance for risk and explore your self-funded plan options before making the change. The rewards can be substantial, but there are risks worth considering. This evaluation process is another area where a trusted consultant like Aon can be valuable.

Level-Funded Plans – A Hybrid Approach

Level-funded plans are an option for employers who want to transition to a self-funded plan but may have less risk tolerance. With level-funding, the employer pays a carrier a set monthly amount – an administrative fee plus the maximum amount of expected claims. At the end of the year, if the claims paid are less than what was paid into the program, the employer receives a refund. If the claims are more, a refund is not available; however, the employer will pay nothing extra.

Level-funded plans carry the advantages of smoother cash flow and less risk. There are disadvantages, however, as the cost savings expected from self-funded plans are somewhat less in a level-funded plan, as there are administrative fees.

To help determine whether self-funded is the right approach for your organization, review the following three advantages of self-funded plans for employers as well as decision points.

1. Optimizing Costs

A self-funded plan can help businesses optimize their healthcare costs. Based upon Aon’s analysis and our industry expertise, we anticipate that self-funded plans can drive significant savings for businesses with little or no disruption to employee benefits or costs.

In many cases, moving to a self-funded plan can generate savings of at least four to six percent for the employer.

These savings are based on the reduction or elimination of premium taxes, ACA fees and health plan costs for risk charges, reserves, profit and other items. The costs of providing state-mandated benefits might also be avoided through a self-funded solution, further increasing the expected savings for businesses. Even if state-mandated benefits remain in effect, businesses with self-funded medical plans have the flexibility to modify these benefits and gain additional savings.

In addition, if diversity, equity and inclusion are top of mind for your organization, self-funded plans allow for greater flexibility in the expansion of benefits to support these efforts.

What's Your Risk Tolerance?

Self-funded plans can offer substantial savings for employers, but there are also risks an employer needs to be aware of. In a self-funded plan, the employer assumes the risk of paying claims, which means the plan is funded by the employer and claims are paid from employer funds. Claim amounts usually fluctuate from month to month, with some claims significantly exceeding the average. However, employers can mitigate these fluctuations with stop-loss insurance. The premiums for stop-loss insurance may eat into the savings experienced by self-funding, but it dramatically reduces the risk of unexpectedly high claims.

Consider how you manage costs for your workers’ compensation benefits. A self-funded health plan works in much the same way. What is your tolerance for that level of risk? Are you happy to write a check monthly? Or are you willing to incur some risk to reduce your overall plan costs? These factors play a large role in deciding whether a self-funded plan is right for your company.

 If your risk tolerance is less, level-funded plans may be a better option. Some companies have also chosen a level-funding option as a way to transition from fully insured to self-funded. Having a trusted consultant like Aon is important in order to make better decisions around risk tolerance and plan funding.

2. Increasing Control

A self-funded plan also increases your company’s control over its healthcare spending and helps to improve cash flow.

Self-funded employers pay claims as they go, meaning they can take advantage of the lag between when a claim is incurred and when a payment is made to the medical provider. This provides more control over your cash flow. You can also eliminate taxes and other fees that are typically part of a fully insured rate, further enhancing your ability to control costs.

Stop-loss policies are another way to help employers manage healthcare costs. Many self-funded plans use a stop-loss policy to provide financial protection against unexpected large claims, addressing concerns about liquidity and volatility. Most stop-loss policies also limit the employer’s maximum claim exposure each plan year.

Have You Conducted a Historical Claims Analysis?

If you’re considering switching to a self-funded plan, it is critical to conduct a historical claim analysis to fully understand your potential risk and how it would affect your cash flow. This also helps you identify what plan would best fit your employees’ needs. Aon’s proprietary tools can help with this analysis.

Employers with fewer than 500 employees can have more claims volatility compared to a company with a larger employee pool. Employers of this size will want to thoroughly review their historical claims data to ensure they are comfortable with the risk they may incur.

Depending on your employer size, the availability of data could be limited as well, so you may not have access to all the data needed to make a fully informed decision.

Aon can help you access the data you need, review your claims and conduct a historical analysis to determine what your typical claims look like and what large claims you have incurred. Aon’s financial managers create a model that outlines your options to manage claim fluctuations to help you determine whether you have the cash flow to support a self-funded plan.

3. Providing More Flexibility

One of the most favorable advantages of switching to a self-funded plan is flexibility. This can be particularly important for employers that otherwise may have to take off-the-shelf plan designs that don’t fully match their needs or the needs of their employees. Self-funded plans can give you the flexibility to craft a plan to best fit your employee population.

By customizing a self-funded plan, you can choose the deductible and co-insurance levels best suited for your organization.

A self-funded plan also offers the option of eliminating state mandates that you don’t need or that don’t fit your employee population. By unbundling your plan, you can choose a best-in-class pharmacy vendor and a best-in-class medical plan administrator to create an ecosystem specifically tailored to meet the needs of your employees.

Find the Right Type of Plan With Aon

Rising healthcare costs for employers and employees are driving companies to identify and evaluate all options to reduce costs and give employers greater control and flexibility.

There is a real opportunity for employers with 100 to 500 employees to benefit from the market forces that have shaped self-funded plans, making plans more affordable and a better fit for employers of this size.    

Working with a partner like Aon, who has deep experience and expertise in self-funding, including level-funded plans, is key in creating a successful self-funded plan that meets your employee population's health needs and manages your overall risk effectively.