Fully Insured vs. Self-Insured Health Plans: Pros, Cons, and Key Differences

Fully Insured vs. Self-Insured Health Plans

When navigating the world of health insurance, having a grasp on the different types of insurance available can make a significant difference in both coverage and cost.

Two prominent options for businesses are fully insured and self-insured health plans. Each type of coverage comes with its advantages and disadvantages for both the individual and the organization. In this blog post, we'll explore the key differences between fully insured and self-insured health plans, including how they work, their benefits, and potential drawbacks.

Fully insured health plans

When it comes to finding coverage for employees, fully insured health plans are considered a common approach. With a fully insured health plan, employers pay a standard rate to the health insurance carrier each month based on the number of employees enrolled. In turn, the carrier covers the employees’ medical claim expenses.

Fully insured health plan rates and coverage are typically negotiated on an annual basis. Rates depend on the number of employees in the plan.

Benefits

Employers tend to like the predictability and stability that fully insured health plans can offer. The monthly rate offers stability and consistency to make budgeting easier.

Fully insured health plans can help lighten an employer's administrative load. These plans manage claims and expenses through the health care provider. The insurance company handles the claims, covering the costs outlined in the coverage briefs.

Drawbacks

It isn’t all upside with fully insured health plans. While their monthly rates may be predictable, this can also create a sense of rigidity in the coverage. Whether employees file medical claims or not, the carrier still collects its premiums each month.

Similarly, health insurance carriers can add restrictions or limitations to coverage. For example, they might require pre-authorization for some procedures, or limit access to certain services or providers. The employee is responsible for claims that aren’t covered by the policy.

Since plans and coverage are negotiated on an annual basis, they can come with higher rate hikes that can be harder to change mid-year.

Examples

Here are some common examples of fully insured health plans (note: there may be some exceptions in certain instances):

• Employer-sponsored Group plans are the most common type of fully insured plan. Employers buy policies from an insurance carrier for their employees, and the carrier assumes the financial responsibility of paying claims.

• Small Business Health Options Program (SHOP) plans are aimed at small businesses, these plans are offered through healthcare marketplaces and provide an easier way for small employers to find and purchase coverage.

• Health Maintenance Organization (HMO) plans are a type of health insurance plan that requires members to use a network of doctors and hospitals. Fully insured HMOs are common among employers because they often have lower premiums.

• Preferred Provider Organization (PPO) Plans allow employees more flexibility in choosing their healthcare providers. The insurance company takes on the risk, making these plans fully insured.

• Point of Service (POS) plans are a hybrid of HMO and PPO plans, POS plans require members to choose a primary care physician but also offer some coverage for out-of-network services.

Note that while these plans are often fully insured, they can also be self-insured, with the exception of SHOP plans.

Self-insured health plans

Self-insured health plans, sometimes called self-funded health plans, offer flexibility and control over coverage and budget. While they are less common, they can be a good fit for certain companies and employees.

According to the Employee Benefit Research Institute, self-insured health plans have varied over the years. From their most recent data, 55% of employers in a 2022 poll said they offered self-insured healthcare.

In a self-insured health plan, the employer assumes financial risk by paying out medical claims on behalf of employees. The employer covers the cost of medical claims and healthcare expenses directly. This means the company sets aside funds for and eventually pays for employees' medical services as they are incurred.

Benefits

In a self-insured health plan, the employer has greater flexibility because the employer can design the coverage and tailor their plans to meet the needs of employees.

Drawbacks

The most significant drawbacks of self-insured health plans are likely the financial and administrative burdens that come with it.

In self-insured health plans, the employer assumes financial risk for providing benefits. If employees' medical costs are less than the insurance premiums that an employer would have paid with a fully insured plan, the employer’s expenses will be lower

Self-insured health plans involve a fair amount of administrative work to avoid budgeting issues. Sometimes, employers might work with a third-party administrator to handle employee claims and other tasks.

Examples of self-insured health plans

Given the substantial resources required to manage self-insured health plans, larger companies often come to mind. For instance, many Fortune 500 companies choose self-insurance to tailor their healthcare offerings more precisely to their workforce's needs while managing costs. Companies like Walmart, Coca-Cola, and Microsoft have all been known to run their own health plans.

Other employers who may offer self-insured health plans include:

• Educational institutions. Some universities and large school districts opt for self-insured plans to accommodate their varied employee base.

• Healthcare systems. Many hospitals and healthcare providers also choose self-insured plans, leveraging their in-house expertise to manage and control healthcare costs.

• Municipal governments. City and county governments, managing benefits for thousands of employees across different departments, often prefer the flexibility of self-insurance.

Fully insured vs. self-insured health plans

With a general understanding of fully insured vs. self-insured health plans, here’s how the two types of coverage stack up against each other.

ICHRA: The best of both worlds

Looking for coverage with the flexibility that comes from a self-insured plan but without the administrative burden? Searching for something that could save your company cash but doesn’t have the risk? Individual Coverage HRA, or ICHRAs, could be the right fit.

With an ICHRA, an employer offers employees an allowance to purchase their own health insurance on the marketplace or from an insurance carrier. ICHRAs are technically considered self-insured plans because reimbursements are funded by the employer, but they’re considerably more predictable than self-insured group health plans

ICHRAs offer financial stability, with fixed allowances each month. With the allowance, employees can pick their own plan based on their needs, offering flexibility uncommon in fully insured health plans.

ICHRAs don’t come with the same administrative burden or risk as group self-insured plans.

Want the best of both worlds with an ICHRA? Democratize the process of procuring health insurance for your company with Thatch.