Why Self-Funded Health Insurance Isn’t Really Insurance
A company choosing a self-funded health plan over traditional group health insurance is said to be self-insuring. The terminology works well enough to help people understand that the company isn’t purchasing traditional health insurance from a major carrier. But when you get right down to it, self-funded plans are not really insurance at all.
Much of the confusion over self-funded plans is related to the fact that insurance companies are sometimes involved. When they are involved, their only job is to perform the function of a payer. That’s it. The financial responsibility for all the claims made against the plan are the sole responsibility of the employer.
How Traditional Insurance Works
Although you could make the case that traditional health insurance is anything but insurance, let us just assume it is for the sake of this post. Employers and their employees collectively contribute to pay health insurance premiums. This guarantees 100% coverage, based on policy limits of course, regardless of how much an employer/employee contributes to the plan.
For its part, the insurance carrier invests premiums as a way to generate revenue. The goal is to generate enough to meet is financial obligations and still make a profit. Profit is the motive rather than actually covering subscriber healthcare needs.
In terms of payment, healthcare providers bill insurance companies directly. Insurers reimburse providers at an agreed upon rate which is rarely 100% of the going rate for a particular service or procedure. So in order to get paid what they are really worth, healthcare providers need to charge higher rates.
How Self-Funded Plans Work
In a self-funded scenario, a company takes all the money it would otherwise put into group health insurance and, instead, creates a pool from which healthcare claims can be paid. Employees contribute to that pool by way of payroll deductions, just as if they had traditional health insurance.
A company choosing to self-fund is financially responsible for all claims. If they do not have the money to pay claims, their plans go bankrupt. They do not have the luxury of putting that responsibility on an insurance company.
The biggest difference between self-funded plans and group health insurance is administration. An insurance carrier administers its own plan. It may offer that plan through insurance brokers who provide some ancillary administrative services, but they otherwise handle things themselves.
Self-funded plans are not administered by insurance companies. Employers can administer their own plans, but most contract with intermediate firms like Nevada-based StarMed. StarMed offers prepackaged health plans funded exclusively by employers and their workers. Their plans are arranged through a combination of health insurance companies and provider networks. They negotiate rates for services, procedures, etc. These are flat rates more often than not. They then pass the cost of services and therapies along to employers through their monthly subscription charges.
A Less Expensive Alternative
Knowing that they bear the entire financial responsibility for claims made, why would a company choose a self-funded health plan over traditional insurance? In almost every case, the deciding factor is cost. Self-funded plans are, on average, considerably less expensive than group health insurance.
For a small- or medium-sized business struggling to provide health benefits at an affordable cost, self-funding can prove invaluable. A self-funded plan gives an employer with limited resources the ability to still offer basic health benefits without spending more than it can afford.
Although insurance companies are sometimes involved in self-funded health plans as actual payers, the plans themselves are not truly insurance plans. They are a different way to cover the costs of providing employee healthcare benefits.