A self-funded health plan is one in which the employer assumes some or all of the risk for providing healthcare benefits to their employees. The employer takes control of the assets of the plan, invests them to their advantage and has flexibility of plan design to meet employee needs.
With self-funded insurance, each company determines their desired funding amount, using an insured stop-loss limit to control costs. If claims climb above that limit, stop-loss picks up the difference. Unbundling allows you flexibility and transparency with your healthcare programs. This funding arrangement gives you savings and cash flow alternatives.
With self-funded insurance your company holds its own claims reserves, which earn interest. If you have a good year, you keep your claim reserves. If you have a year where claims are high, your stop-loss insurance protects the plan.
An employer does not pay full state premium taxes, which usually range from 4%-6% of the monthly insurance premium. Every state taxes insurance companies on the premiums collected. The insurance company in turn passes these costs back to the employer. In a self-funded plan, premiums are collected only on the stop-loss coverage - a fraction of the regular insured premium. Therefore, premium taxes are substantially reduced.
In a self-funded plan, employers do not pay insurance company risk and retention charges. An insurance company charges several fees to insure and administer a health plan. Many of these, such as booklet printing costs or actuarial fees, must be paid no matter how the plan is funded or who administers it. However, some insurance company charges, such as risk and retention charges, are not applicable to self-funded plans. They simply do not exist in a self-funded situation.
The employer retains control over the health plan reserves, enabling maximization of interest income. When the employer decides to self-fund and all claims have been paid under the old insurance contract, the employer recaptures any reserves that are left. Usually the employer then invests this money and receives the interest income.