What Is a Self-Funded Employer, and Why Should You Care?

What Is a Self-Funded Employer, and Why Should You Care?

If you are a user of the Alerts app, there is a reasonable chance that your employer is self-funded, and that has important implications for the way you look at pursuing healthcare. You may not think of your employer as a critical ally in the struggle to obtain quality care at the lowest-possible price, but you and your company have a vested interest in working together. Through collaboration and communication, your employer can help you get a handle on your insurance benefits, what they cover, what they don’t, and how to pursue health services that are higher in quality and lower in cost. It also gives you an opportunity to relay critical feedback to your employer about whether the benefits your employer provides are, well, beneficial. Your employer likely does not want to pay for something that you don’t want to use or that does not benefit you. If nothing else, working together increases your collective ability to put money that’s on the table back into your own pockets! 

Basic health insurance terms—a refresher.

Need a refresher on health insurance terminology? You are not alone. A 2017 survey from Policygenius reveals that a whopping 96% of Americans overestimate their understanding of health insurance terms. If you’d like to brush up, here are some of the basics: 

Claim: A claim is a request for payment that an insured person or his or her physician submits to the insurance carrier for medical services that the insured person has received. Payment from the claim covers the cost of the medical service. 

Deductible: The amount of money you pay out of your own pocket for healthcare before your health insurance starts to pay for covered services. Sometimes a plan has a separate deductible for a specific service. It is also not unusual for your plan to cover basic items like check-ups before you’ve hit your deductible amount. 

Premium: This is the amount you and your employer pay for your health insurance every month. On average, the employer pays about 82% of the premium, and the employee pays the remaining 18%.  

Co-Pay/Co-Payment: A set figure that you pay after you have paid your deductible, for a covered healthcare service. Once you hit your deductible amount, you only pay the co-pay, and your insurance covers the rest. If you have yet to hit your deductible for the year, you pay whatever the maximum allowable cost is for the service you are receiving (lab tests, doctor’s visits, etc.). 

Co-Insurance: This is the percentage of your healthcare costs that you pay after you have paid your deductible. It works the same way that co-payments do. The difference is that those with co-insurance pay a percentage of total costs, whereas those with copayments pay a fixed dollar amount.  

HSA: An HSA is a health savings account. You can deposit funds to this account on a pre-tax basis to pay for certain kinds of medical expenses, including co-pays, deductibles, and other items. By using pre-taxed dollars (that are usually deposited as a portion of your income from your employer), you can reduce your overall healthcare costs.  

This list is hardly exhaustive. If you want to check something, and you don’t see it listed here, check HealthCare.gov’s glossary.

What does it mean if your employer is self-funded?

If an employer is self-funded (sometimes also called being self-insured), it means the employer has elected a section 105 and taken on the risk of covering health insurance expenses for its employees.

Let’s break it down: 

In a traditional health insurance setup where the employer is fully insured, the employer and employees who are on the company health insurance pay the insurance carrier a fixed premium, and the insurance carrier pays for the employees’ healthcare claims minus anything the employee must pay in the form of co-pays or deductibles.   

The variable cost or risk of self-funding is how much in medical and pharmaceutical goods and services employees will consume, which varies with time, by how savvy employees are about consuming care, and of course by how healthy employees are.   

The variable cost or risk of self-funding is how much in medical and pharmaceutical goods and services employees will consume, which varies with time, by how savvy employees are about consuming care, and of course by how healthy employees are.   

In a self-funded plan, the employer designs a plan that it thinks will best serve its employees. It is not unusual for the employer to work with a third-party administrator (TPA) or insurance broker to put the plan together. Sometimes, the law requires that the employer work with such a professional. In self-funded plans, the employer pays for the employees’ healthcare claims (i.e., insurance-covered healthcare expenses) as opposed to the insurance carrier. On one hand, this opens opportunities for both immediate and more long-term savings for the employer, other financial benefits, and greater control over the design of the benefits they offer employees. On the other hand, the variable cost—or risk—of self-funding is how much in medical and pharmaceutical goods and services employees will consume. That amount varies with time, it varies by how savvy employees are about consuming care, and of course, it varies by how healthy employees are.   

Why do companies choose to be self-funded?

We cannot speak for the motives of any one company, but in general, a few reasons drive employers to go the self-insured route: 

Financial benefits.

Tax benefits. Employers who elect to be self-funded are exempt from ERISA rules. Private self-funded employers are also exempt from most state insurance laws (and taxes), and that results in immediate savings for employers. 

Savings on not paying premiums. In fully insured plans, the employer is paying for potential claims in advance through premiums, which can be based on community rates of healthcare consumption. In a self-insured structure, the employer only pays for claims as they arise from the healthcare services that employees use. So, if the employee plan members have a group risk that is lower than what would have been charged via premiums, the employer can realize substantial savings. 

Increase in cash flow. Because the employer is not paying for health services in advance via premiums, the employer is hanging on to portions of its cash reserves until these actual claims arise. 

Savings on plan designs. By virtue of being self-funded, employers can custom build plan offerings that are tailored to meet the needs of their staff. They can cut excess programs and tools that do not have a significant impact on their plan members, saving money and reducing waste.

Greater flexibility in designing plans.

By running their own health insurance plans, employers have more options regarding the benefits they choose to offer.

Greater visibility into plan usage.

By being self-funded, employers have more information regarding how their benefits offerings are being used. This information can help them tailor their offerings to meet the needs of your colleagues who are also covered by the company’s insurance.  

Self-Insured Health Insurance by the Numbers

Although most people are familiar with traditional, fully insured plan arrangements, it may surprise you to know that the self-funded option is picking up steam. In fact, as of 2020, 67% of covered employees are covered through a self-insured employer (KFF). Now, it’s much more likely that employees of large firms are covered through self-funded plans—the median employee count of self-insured employers was 6,200 in 2020—but that doesn’t mean that smaller employers can’t choose self-funding. They can, and they do. Regulatory changes have opened which organizations are eligible to choose that structure. 

Why should you care that your employer is self-funded?

We’ve said it before, and we’ll say it again: knowledge is power. We do not dispute that the average American healthcare consumer faces a steep uphill battle in the effort to pursue quality healthcare at affordable prices. As that consumer of healthcare, your ability to leverage even marginal gains in this regard is made no easier by a lack of awareness of how your employer approaches healthcare and what that means for you. For instance, if you know your employer is self-funded and what that means, you know that: 

Your employer is betting on you, and what’s good for your employer is good for you. As we explained, the variable cost (i.e., risk) of running a health plan as self-funded employers do is how much or how intense the need for care is among the insurance-covered staff because the employer is paying for its plan members’ healthcare claims. Employees’ ability to influence total claims is a result of how well they can pursue quality care at an affordable rate and how healthy they are (because generally speaking, the healthier a person is, the less healthcare that person needs to consume in the form of medications, treatments, and appointments). In other words, your employer is betting you can learn to be a savvy consumer and to be as healthy as possible. You should care because how this risk plays out does not just affect your employer, it also affects you. If this risk pays off, you may benefit from your employer’s substantial savings. Financial wins for your employer increase opportunities and the ability for you to enjoy things like a wage increase, job growth or a promotion, building renovations, new and better benefits, and so on. If the risk does not pay off — well. If your company needs to tighten its belt for any reason, that makes it harder or less likely there is room in the budget for these perks, and financial loss is bad for company morale. If that isn’t enough to motivate you, consider this: 

You also could save money. There’s more in this for you than helping your employer save and hoping some of those wins come back to you indirectly in some fashion or another. You could put some real money back into your own pocket by learning to be savvy as a healthcare consumer. And, because your employer is self-funded, you know you have allies. Your employer is a sound resource for helping you learn tips and tricks for getting your healthcare for less. Hopefully, some of your benefits tools and providers of those benefits can help you access quality care for less because that is what they are designed to do or because they share quality educational materials, respectively. Every dollar you save because you are accessing medications, treatments, and appointments for less or free of charge is a dollar that stays in your pocket. Considering how much medical expenditures are needlessly, massively, an often erroneously marked up, there’s a chance that there are savings on the table for you to claim. If you’ve given all your benefits an honest try and you’re not impressed, you are far from stuck. You should speak up about it because: 

You can influence plan design. Remember, self-funded employers choose the self-funded route because it gives them more control over the design of the health insurance plan it offers employees. That control gives your employer more ability to offer benefits that meet your needs and the needs of your colleagues, but to make that happen, they need your feedback on whether the benefits they decide to offer are beneficial. You’ll want to provide honest feedback to the person or entity that oversees benefits. This person may be in Human Resources, Administration, or, if your company is large enough, may be an employee benefits officer or department. 

So far, we’ve outlined four reasons why you want to know how your employer structures your employer-sponsored health insurance and why you should care:

  1. knowledge is power
  2. your employer is betting on you—and what’s good for your employer is good for you
  3. you also could save money and
  4. you can influence insurance plan design 

There is, of course, at least one more reason. Last, but not least: 

Your health and wellbeing are on the line. Your health and wellbeing are affected by your efforts to be healthy, but they also are affected by your ability to access affordable, quality care. Your employer is an important participant in your healthcare experience in employer-sponsored plans, so you need to know the basic ins and outs of how your plan is structured to gain maximum value from your benefits.  

 It’s as simple as that. 

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