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Self-Funded (Self-Insured) Plan Definition
A Self-Insured or Self-Funded plan refers to a situation where the employer takes on the financial risk for its employees with health care benefits. In plain terms, Self-Insured employers fund claims out-of-pocket as they are charged as against a Fully Insured Plan which entails paying a premium that has been pre-determined to an insurance carrier. Usually, a special trust fund is set up by a self-insured employer in a bid to earmark money for the payment of incurred claims. The money earmarked include corporate, as well as, employee contributions.
A Little More on What is a Self-Funding Insurance Plans
A third party administrator (TPA) refers to an entity responsible for processing or adjudicating claims for an employee benefit plan. A third party administrator may provide added services to an employer or employee benefit plan such as to contract for PPO services, collect premiums, provide utilization review of claims, and related ancillary services to operating the employee benefit plan. It is possible for Self-insured employers to either have an in-house administering of the claims or subcontracting the service to a third party administrator.
There are various reasons employers pick self-insurance as a better alternative. The following are the major reasons:
The employer can design the plan to meet its workforce’s health care needs as against purchasing an insurance policy that caters for a wide range of needs.
The health plan reserves are controlled by the employer which enables interest income maximization. This refers to income which an insurance carrier will generate by investing premium dollars.
The employer doesn’t have to pay in advance for coverage, hence providing for better cash flow. Since self-insured health plans are controlled under federal law (ERISA), the employer does not abide by conflicting state health insurance regulations or benefit mandates.
The employer is free from state health insurance premium taxes. Usually, these taxes are 2-3% of the premium dollar value.
The employer can freely enter into a contract with the providers or provider network suitable to meet the employees’ health care needs.
A self-insured plan is not the best option for all employers. Since a self-insured employer takes on the risk for the payment of its employees’ health care claim costs, it must have the financial resources to meet this requirement which could be unpredictable. Hence, small employers, as well as, other ones with poor cash flow discover self-insurance to be an option that isn’t feasible. Note, however, that companies exist which have as little as twenty-five employees who maintain self-insured health plans that are viable.
Employers can protect themselves against unforeseen, catastrophic claims. While the biggest employers have adequate financial reserves for covering almost any amount of health care expenses, the majority of self-insured employers purchase stop-loss insurance. This insurance type is purchased by these self-insured employers in order to reimburse them for claims that go beyond a certain dollar level.
Self-funded group health plans are under every applicable federal law with the inclusion of Health Insurance Portability and Accountability Act (HIPAA), the Pregnancy Discrimination Act, the Americans with Disabilities Act (ADA), Employee Retirement Income Security Act (ERISA), the Age Discrimination in Employment Act, the Civil Rights Act, Consolidated Omnibus Budget
Reconciliation Act (COBRA), and a number of budget reconciliation acts like Deficit Reduction Act (DEFRA), Economic Recovery Tax Act (ERTA), and as Tax Equity and Fiscal Responsibility Act (TEFRA).
References for Self-Funded Insurance Plans
Academic Research on Self-Funded (Self-Insured) Plan
• Self–insured health plans, McDonnell, P., Guttenberg, A., Greenberg, L., & Arnett III, R. H. (1986). Health Care Financing Review, 8(2), 1.
• Prevalence of employer self–insured health benefits: national and state variation, Park, C. H. (2000). Medical Care Research and Review, 57(3), 340-360.
• Self–funded health benefit plans, Rublee, D. A. (1986). Journal of the American Medical Association, 255, 787-789.
• ERISA Preemption: The effect of stop-loss insurance on self–insured health plans, Lenhart, J. G. (1994). Va. Tax Rev., 14, 615.
• Recent Trends In Self–Insured Employer Health Plans: A look at the interplay among market forces, regulation, and employers’ decisions to self-insure., Marquis, M. S., & Long, S. H. (1999). Health Affairs, 18(3), 161-179.
• Insuring the Protection of ERISA Plan Participants: ERISA Preemption and the Federal Government’s Duty To Regulate Self–Insured Health Plans, Schaeffer, D. K. (1999). Buff. L. Rev., 47, 1085.
• The Future of Self–Funded Health Plans, Caster, K. (1993). Iowa L. Rev., 79, 413.
• Self–funded health benefits plans: marketing implications for PPOs and employers., Scammon, D. L. (1989). Journal of health care marketing, 9(1).
• Self–insured health benefit plans, Brien, M. J., & Panis, C. W. (2011). Deloitte LLP and Advanced Analytical Consulting Group, Inc.
• Self–insured health insurance coverage, Fernandez, B. (2010). Congressional Research Service.
• Health Care Crisis: Improving Access for Employees Covered by Self–Insured Health Plans under ERISA and the Americans with Disabilities Act, The, Schacht, L. J. (1994). Wash. UJ Urb. & Contemp. L., 45, 303.