What is Self Funding? Part 1 in a series

We will start with an overview of self-funded medical plans. Essentially, a self-funded plan is a fully insured medical plan that is broken into its different parts.

To an employee, the difference is not noticeable – they still have a plan deductible, a network of providers, co-pays, drug benefits, and other familiar parts of a medical plan. They go to the doctor, pay their portion, and the insurance pays the rest.

However, for an employer, things are much different. On a fully insured basis, the employer picks a plan, pays the monthly premium, and hopes the renewal is not too bad. With a self-funded plan, the employer creates their own schedule of benefits (more on that later), utilizes underwriting to create a claims pool, and gets to choose all the vendors that handle claims, insurance protections, drug benefits, etc. Also, because the employer pays claims, they get great information on what was paid, prescription drug and large claim information, and lots of transparency of where the money is going.

The biggest difference between Fully Insured and Self-Funding is who retains the un-used claims dollars. In a good claims year, Self-Funded clients keep un-used claim dollars. In a bad year, Self-Funded clients have insurance protections that cap the claims expense. In a Fully Insured plan, the insurance carrier keeps un-used claims dollars.

Now, the purpose of this article is not to sell a fully insured employer on going self-funded. There are benefits and a need for both types of medical plans. What you will learn from this series of articles is that a fully insured medical plan uses the same tools as a self-funded plan. By learning self-funding, you will have a better grasp on how your fully insured plan works.

So, let’s begin with an overview of the parts of a self-funded plan.

There are 3 parts of a self-funded plan:

1. Fixed cost (Administration, Specific Stop-loss and Aggregate Stop-loss Insurance)

2. Claims

3. Run-off (Terminal Protection)

On a monthly basis, the “premium” of a self-funded plan is made up of the cost of someone physically processing the claims (Administration cost), the potential claims liability per employee (Claims), and the cost of protecting the claims pool (Specific Stop-loss and Aggregate Stop-loss insurance). The Run-off (Terminal Protection) does not come into play until you either change administration companies, or decide to go back to a fully insured plan after being self-funded. Run-off acts like a “mini” self-funded plan (and yes – more on that later).

In the next coming articles I will talk about a specific section of a self-funded plan. Next topic – Fixed Cost. We will talk about Administration in a self-funded plan.