As an employer, structuring your health insurance coverage and choosing options that will fit your employees’ needs is a very important decision. You should weigh your options to see what works best for you and your business structure. Understanding the difference between fully funded and self-funded is a great place to start, so let’s jump right in.
This is the more traditional approach to employer-sponsored health insurance. In the fully-funded health insurance structure, the employer buys health insurance coverage from an insurance company.
This is a better option for smaller employers, as the insurance company carries the majority of the risk. There is only a limited amount of administrative work for the employer, as the insurance company will collect the premiums each month and pay out claims accordingly throughout the year.
When working with an insurance company, the employer will have less flexibility in choosing the specifics of their health insurance coverage. This type of plan is sometimes criticized for it’s “cookie cutter” coverage options. These employers will also spend a portion of their health insurance costs on administrative costs since the insurance company is taking care of these duties.
Self-funded, or self-insured health plans are more risky for the employer as they are funding the plans, not the insurance company. This is a better choice for larger companies who are able to account for variations in cost.
This type of plan allows employers more flexibility and customization rather than the “one size fits all” plans that insurance companies offer. With this plan employers have more control over how their healthcare expenses are being used.
These plans are often subject to less regulation, so this is a way to cut costs for larger organizations, plus they cut out the middleman in a sense. Generally, the employer sets aside a certain amount for insurance payouts and anything that is left at the end of the year stays with the employer.
It can be difficult to predict how many claims your employees will file throughout a given year. If there are more claims than expected or an employee has a major health crisis, the expenses can skyrocket.
Employers have the option to invest in “stop loss” insurance, this is designed to help the employer financially if their claims become too overwhelming to cover. This alleviates some of the risk involved in a self-funded set-up, however it can be pricey.
The Key Difference
The most notable difference between the two is the level of financial risk that the employer takes on. The employer who chooses a fully-funded option assumes less risk because their insurance carrier will process and pay out claims.
For example, if their employee goes to the hospital, the insurance company will handle the administrative duties in regards to the claim and pay out what is needed.
Employers who opt for a self-funded or self-insured plan assume a higher level of risk. These employers set aside a certain amount of money each year that will cover employees’ health insurance claims.
While they are removing the administrative costs of a fully-funded plan, they are financially responsible for paying out claims. If one of their employees goes to the hospital, they will be paying out of their own account for this claim.
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