Health Insurance Articles
What Is A Self-insured Health Insurance Plan?
2009-11-10
Employers offering health insurance to their employees can either buy a fully insured plan from an insurance company or provide health benefits directly in the form of a self-insured plan. In the latter, the employer directly assumes the major cost of his employees' health insurance coverage. When an employer uses an insurance company plan, they pays a premium to the insurer, and the insurer pays claims out of the pool of premiums it collects from everyone it insures. Under a self-insured plan, an employer with enough employees can create his own risk pool and pay for each claim out-of-pocket as it is incurred. Most often, employers who establish a self-insured plan use a third-party administrator (TPA) to handle the claims. The TPA may be an insurance company, but the benefits are provided directly by the employer.
Self-insured plans are regulated by the Employee Retirement Income Security Act (ERISA) and are under the jurisdiction of the U.S. Department of Labor. Unlike insurance company health insurance coverage, these plans are not subject to state regulation. As the employer need only answer to federal law, this makes life easier for a large company with locations in several states as it does not have to deal with a plethora of different regulations.
There are two kinds of self-insured plans. One is an indemnity program, which reimburses the employee for the medical care he has received. In the other type of plan, the employer provides benefits through an HMO or through an insurance company's existing PPO network. Most self-insured companies insure themselves against heavy loss by buying "stop-loss" insurance to cover claims above a specified limit.
There are a number of advantages to self-insurance. The employer saves money if losses are less than predicted. Without administrative costs, agent commissions, brokerage fees and premium tax, insurance expenses can be largely reduced. The employer can use funds normally held by the insurance companies, improving cash flow. As the employer assumes the risk directly, he has a motive to promote "wellness" programs for the employees. There can also be disadvantages. Losses may be greater than foreseen and the employer may have already used now-needed funds for other purposes. If the employer tries to administer the program himself, he may underestimate the personnel and expense needed to do so. As the employer cannot take premiums paid as a deduction, his income taxes may be higher. The employer can only deduct the cost of claims paid and administrative expense.
Self-insured plans have become increasingly popular over the last few years. In 2008, 89 percent of workers employed in firms with 5,000 or more employees were in self-insured plans, and 55n percent of all insured workers were covered by a self-insured plan.
