As a small-business owner, the decision to provide health insurance for your employees is a big one. Where do you start?
For many employers, the first step is deciding how to fund coverage –through a fully-insured plan or by taking a self-insured (or self-funded) approach.
Under a fully-insured health plan, you pay a predetermined monthly premium to a commercial insurance company. In return, the company pays claims incurred by your employees and their covered family members under the terms of the insurance policy you have purchased.
Under a self-insured (or self-funded) health plan, you cover your employees’ health care bills with funds from the company’s general assets. The monthly premiums you collect are used to pay claims as well as to cover administrative costs.
What You Need to Know
Fully-insured plans offer predictability and fixed costs although they came at a higher price tag.
Self-funded plans allow you to earn interest on unused funds but set you up to pay big bills right away and take longer to set up.
Fully-funded and self-insured health plans manage the problem of the cost and unpredictability of healthcare in different ways.
What Are the Biggest Challenges for Providing Healthcare Coverage?
There are two major challenges in providing healthcare for your workers.
First, healthcare is expensive. A national survey by the Kaiser Family Foundation reports that the average annual cost for family coverage at both small and large companies was just over $20,000 in 2019.
Second, healthcare needs are unpredictable. You can’t know how high someone’s healthcare costs will be, and multiple employees can have high costs simultaneously.
This can make providing coverage risky, especially for small companies that might have cash-flow problems or pressing needs when a large healthcare bill comes due.
Fully-funded and self-insured small-business health plans manage these problems in different ways.
How Do Fully Insured Health Plans Manage Costs?
With a fully insured plan, you pay your health insurer a set premium every month. The premium stays the same for a year, unless the number of people your plan covers changes.
Your monthly payment covers the price for providing and administering the coverage, the insurer’s profits, and taxes and fees and any costs your employees and their covered family members incur.
How Does an Insurance Company Set Rates for Your Plan?
The healthcare-only part of the premium price is based on what plan you choose and some facts about your employees.
The kind of plan(s) you choose
Most insurers offer health plans at multiple price points. They differ in which services they cover, how much of the costs people pay out-of-pocket, and how many providers are included. A plan with high deductibles (HDHP) will cost less than a plan that provides access to a wide provider network (an indemnity or fee-for-service plan), for example.
Age and health of your employees
The Affordable Care Act (ACA, or Obamacare) limits what demographic and health traits insurers can use to set premiums for small-business employees.
An insurer may take into account the ages of your employees and their covered dependents, setting premium prices for older adults up to 3 times the price of coverage for a 21-year-old.
Insurers may also raise the premium price up to 50% for someone who self-reports tobacco use, if state law allows it.
Your business location
Healthcare costs vary from place to place, even within a state. Insurers may consider the costs in your area when setting premiums.
How Do You Know Insurers’ Rates Are Reasonable?
Insurers must submit their proposed rates for small-group policies to either state or federal regulators for approval, depending on the state.
The ACA also requires insurers to spend 80 to 85% of premium dollars on medical care and healthcare quality, not administrative costs. If they spend less on care, they must issue rebates.
This is called the “medical loss ratio” rule, and it doesn’t apply to businesses that self-fund health plans.
The Pros of Fully-Insured Plans
If one of your employees has a high bill, your insurance company, not you, will pay the cost
Fixed administrative costs
Your monthly premiums cover the costs of administering your plan, so you don’t need to hire anyone else to do it.The insurer will handle compliance requirements for you (e.g., producing a summary plan description, generating summaries of benefits and coverage and certain ACA-related filings.
The Cons of Fully-Insured Plans
High overall cost
Paying an insurer to oversee your plan and assume the risk of high-cost claims is expensive.
Your premium covers insurer profits and state taxes, which average between 2 and 3% of the premium’s dollar value. Self-funded plans don’t pay these costs.
If your employees’ healthcare costs over the course of a year are lower than what your insurer charged for them, the insurance company keeps the money at year’s end. You will need to renegotiate your contract annually. And if your costs were higher than expected the previous year, your premium can increase substantially.
How Do Self-Insured Health Plans Manage Costs?
With self-funded plans — also called self-insured plans — business owners are on the hook for healthcare bills. The employer pays claims as they are submitted, which can make self-funded coverage unpredictable.
However, to help keep costs down, self-funded small-business plans don’t have to follow most of the coverage requirements of fully-insured plans.
How Is Your Self-Funded Plan Structured?
Self-insured plans are mainly regulated by ERISA, the Employee Retirement Income Security Act. ERISA requires employers to put plan participants’ contributions into a trust reserved for paying healthcare bills. You must pay whenever a plan member submits a bill for covered services.
Additionally, most self-funding small businesses pay two fixed-cost bills each month. They hire a contractor to administer their health plan. They also pay a monthly premium for “stop-loss” insurance to pick up the most expensive claims.
Who Will Administer Your Self-Insured Plan?
While employers can administer health plan claims in house, most prefer to hire third-party administrators, or TPAs, for administrative work. Some insurance companies also offer “administrative services only” contracts, or ASOs. Both kinds of business generally bill a monthly fee.
TPAs and ASOs do these jobs, among others:
- Collect premiums
- Process and pay claims
- Review claims to ensure they’re payable under the terms of your health plan
- Answer customer-service inquiries and complaints
- Contract with healthcare providers
- Prepare reports and analyses to help you design your plan
What Is Stop-Loss Insurance Coverage?
Stop-loss insurance reimburses the employer for claims that exceed a predetermined dollar amount.
There are two kinds of stop-loss coverage. Many employers buy both.
Individual — or specific — stop-loss insurance covers catastrophic claims for individual employees. An aggregate stop-loss policy kicks in when annual spending for your entire group exceeds a certain dollar amount. After that point, the insurer pays all costs of care for the rest of the year.
The Pros of Self-Insured Plans
If you have low or no spending in some months, you can put the unused funds in an interest-bearing account
If your trust has reserves at year’s end, you can roll them over to help pay next year’s costs.
The Cons of Self-Insured Plans
You must pay even large bills right away. You’ll need to plan for that, especially if your company’s cash flow is irregular
Because you design it yourself, it will take longer to get a self-funded plan up and running than a preset fully-insured plan.
Insurance decisions are always a matter of balancing benefits, costs and risk.
How Do You Compare Coverage for Fully-Insured Plans?
All fully-insured small-group policies must cover the ACA’s essential health benefits (EHBs). Insurers can’t impose lifetime or annual limits on the dollar amount of coverage someone receives in an EHB category.
The EHBs are:
- Outpatient care
- Emergency services
- Pregnancy, maternity, and newborn care
- Mental health and substance use disorder services
- Prescription drugs
- Rehabilitative and habilitative services and devices
- Laboratory services
- Preventive care, wellness services, and chronic disease management
- Pediatric services, including oral and vision care
Fully-insured small-business policies must cover ACA-specified preventive services with no patient cost sharing. The services include certain immunizations, wellness visits, and some women’s health services.
Fully-insured plans for small business are regulated by both states and the federal government. A fully-insured policy will include benefits mandated by your state, such as contraception or access to certain providers like chiropractors.
Most insurers have plan packages for fully-insured small businesses to choose from. They range from high-deductible coverage and HMOs to plans that offer access to broad provider networks and add-on coverage like dental or vision care.
Small businesses don’t have leverage to negotiate the details, so they use prepackaged plans as is.
How Do You Compare Coverage for Self-Funded Plans?
Self-funded plans tend to allow employers to customize their plan choices to meet the specific needs of their workforce. You can choose the benefits, level of provider access and payment requirements your plan will include. Self-funded plans may set premium prices at any level they choose.
You will also have access to your employees’ healthcare claims, including providers they see, services they use, and costs. You can use this data to tweak your plan to lower costs and better meet your workers’ needs.
These ACA provisions apply to self-funded small-business plans:
• Dependent coverage. Must provide dependent coverage for adult children up to age 26.
• Preventive services. Must provide ACA-specified preventive services with no cost sharing.
• EHBs and coverage limits. Self-funded small-business plans aren’t required to cover the ACA’s essential benefits. If your plan does cover an EHB category, though, no annual or lifetime limits may be imposed on the dollar amount of coverage an individual may receive.
Insurance decisions are always a matter of balancing benefits, costs and risk. Consider working with a broker or benefits consultant to design your plan and determine the funding approach that makes the most sense for you and your employees. But having a thorough understanding of the pros, cons, ins and outs of fully insured and self-insured structures will arm you for those important conversations.