Q.- What is the difference between a self-funded and an insured health plan?
A.-
- Who Pays Claims
- Self-Funded Plan:
The employer pays claims out of its own funds - Insured Plan: The insurance company pays claims. The employer pays fixed monthly premiums to the insurer.
- Self-Funded Plan:
- Plan Funding
- Self-Funded: The employer sets aside money (often in a trust or operating account) to pay actual health claims as they are incurred.
- Insured: The employer pays a premium to the insurance company regardless of actual claims incurred.
- Regulation
- Self-Funded: Primarily regulated at the federal level under ERISA (Employee Retirement Income Security Act). Exempt from most state insurance laws, including mandates and premium taxes.
- Insured: Subject to state insurance laws and mandates in addition to federal rules (ERISA).
- Risk
- Self-Funded: The employer assumes all risk for claim costs, but many purchase stop-loss insurance to cap their exposure.
- Insured: The insurer assumes the risk. The employer’s cost is fixed (premiums), regardless of claims volume, but premiums may be adjusted from year to year based on claims.
- Cost Predictability
- Self-Funded: Costs vary month to month depending on claims. Potential for greater savings in low-claim years but higher costs in high-claim years.
- Insured: Monthly premiums are predictable, though they tend to be higher due to insurer profit margin and risk load and premiums may increase from year to year.
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This article is for informational purposes only and is not intended as legal, tax, or benefits advice. Readers should not rely on this information for taking (or not taking) any action relating to employment, compliance, or benefits. Always consult with a qualified professional before making decisions based on this content.
