Self-Insured Health Plan 101: Should a Business Be Self-Insured?

Key Takeaways

• Self-insured plans are plans where an employer or organization takes responsibility for the costs of employee medical care.
• A third-party administrator can make a self-insured plan easier to manage for businesses and reduce administrative burdens.
• Self-insured plans can come with drawbacks like financial risk, but protections like stop-loss insurance can minimize these concerns.
• Businesses can maximize the value of self-funded plans by providing employee education and promoting wellness initiatives in the workplace.

Employers have several options as they seek to offer health insurance to their employees. When business owners think of finding health insurance, they often think of turning to a large, third-party company for a fully insured plan. However, self-insured health plans provide another popular option that bypasses working with a costly insurance enterprise and comes with several advantages.

Self-insured plans allow employers to offer health plans that meet their employees’ unique needs, save costs, and provide more control over their healthcare plan management. Still, business owners should consider whether self-insured plans are right for them and their employees based on their needs and the plans available.

What Is a Self-Insured Health Plan?

A self-insured health plan is one where the costs of employee medical care are the responsibility of the employer or association. Self-insured plans offer an alternative to a fully insured plan, where the costs are paid for by an insurance company.

Self-insured plans can be managed solely by an employer, but they’re often managed through a third-party administrator (TPA), which is an outside organization that handles the administrative functions. A TPA can help to piece together a plan and administer the programs, but the employer still manages the costs.

Self-insured plans are regulated under the Employee Retirement Income Security Act (ERISA), which sets minimum standards for retirement and health plans to provide adequate protection for individuals under these plans.

Benefits of a Self-Insured Health Plan

Although we often think of healthcare coverage as requiring a large insurance company to provide the plan, 65% of covered workers in 2023 were enrolled in plans that are self-funded. A self-insured health plan helps businesses save on costs and gives them more control in managing employee health claims.

Cost Savings

Because a self-funded plan cuts out the middleman of an insurance company with high administrative costs, employers avoid the costs that would normally go to boosting profits for a big insurance company. As a result, businesses and their employees enjoy cost savings through lower premiums and out-of-pocket costs.

Additionally, when healthcare spending is low, businesses get the returns. If employee healthcare claim costs are lower than expected in a given year, those savings return to the employer, allowing them to reallocate funds and reinvest in other areas of their business.

With this model, businesses have more control over their spending as they can take steps and build initiatives to prioritize preventive care, minimize healthcare spending, and save costs.

Flexibility and Customization

Since businesses have more autonomy with self-insured plans, they have more capacity to customize their plans as needed to meet employee requirements and preferences. Businesses can start by choosing to self-insure full insurance coverage or simply self-insure dental and vision while pursuing fully funded insurance for overall medical coverage.

From there, businesses can build plans based on their employee needs and adjust the deductibles, copayments, and premiums as necessary. This control allows businesses to set rates that better serve their employees and adapt plans to meet changing employee demographics and healthcare needs.

Access to Claims Data

Since healthcare claims go through the business instead of a large enterprise, businesses have greater access to their employees’ claims data, either directly or through a TPA. This data may include claim amounts and insight into where the money is being spent.

With this data available, businesses are able to identify trends in employee health claims and use this information to determine opportunities for cost savings and promote better health outcomes.

This data is valuable on a year-over-year basis as it allows businesses to make adjustments to their plans as they see fit. For example, if claim costs were low in a given year, businesses can adjust their healthcare allocations for future years and redirect part of their budget elsewhere.

However, if claim costs were higher than expected, it can provide insight into whether a business should take steps to reduce future spending. Good steps may include encouraging more preventive care, offering nutrition guidance, or building workplace initiatives to encourage more exercise.

Drawbacks of a Self-Insured Health Plan

Although there are several benefits to a self-insured health plan, businesses must also be aware of the potential challenges so that they can navigate them. There are two key potential drawbacks to a self-insured health plan, but fortunately, businesses can take steps to alleviate these concerns.

Financial Risk

Although businesses with a self-funded plan can save money, there is still an added level of financial risk if employee healthcare costs over a year are higher than a business expects. If a business budgets a given amount for employee claims data and employees visit the doctor more often, it can result in spending over that expected allocation.

However, there are measures you can put in place to protect your business against financial losses and unexpectedly high costs. For example, stop-loss insurance is a valuable resource in this case.

Stop-loss insurance will reimburse the employer for any expenses they make over an agreed-upon limit. The insurer will then work with the employer to discuss an appropriate stop-loss limit for the upcoming year based on your anticipated spending.

Regulatory Compliance

When pursuing self-insured plans, businesses must be sure to follow state and federal requirements for the minimum a health plan must offer. Your business may also have to report to the government at the end of the year on the health insurance coverage you offer.

Many small businesses stick with fully insured plans over self-insured plans because they prefer not to manage the hassle of organizing a plan and ensuring it fits within minimum coverage requirements. In this case, businesses can turn to a third-party administrator (TPA) who can help build a plan to ensure that the plan complies with government regulations and reporting requirements.

Should a Small Business Be Self-Insured?

A large percentage of covered workers in 2023 were covered under self-funded plans. However, 83% of these workers were at large firms, and only 18% were at small firms.

Typically, small businesses are less likely to pursue self-funded insurance because of the risk of high costs and the fact that building an effective plan can be time-consuming. With the right plan, though, small businesses can benefit greatly from taking the self-funded route without minimal risks.

For example, pre-built plans with stop-loss insurance to minimize losses can minimize financial risk. Third-party administrators also offer established plans with clear pricing that provide financial transparency, low rates, fixed premiums, and a lower barrier to entry—all of which reduce the typical administrative load of managing a self-funded plan.

Choosing the right self-insured plan also depends on a business’s needs. If your employee base is largely healthy and does not often submit large healthcare claims, self-funded plans are a great option.

Employee Education and Communication

As with any healthcare plan, it’s essential that self-funded employers communicate to employees what they can expect out of their coverage and educate them on the resources available. It’s also important that staff understand how they can use their plan to their benefit.

Businesses can take the following steps to educate their employees and ensure they understand their policies and coverage options:

• Distributing printed materials to new and current employees periodically
• Presenting the benefits and procedures of a plan to new employees
• Providing ongoing updates about their plan through newsletters, emails, or other communication channels
• Creating initiatives to highlight the value of preventive care
• Communicate any changes in rates or plan benefits to employees in writing and email

Promote Wellness Programs

The concept of a self-funded plan also offers businesses the opportunity to save themselves costs down the road. It’s in an employer’s best interest to keep healthcare costs low and minimize health risks for their employees.

Businesses can save even more when their employees stay healthy and visit the doctor less. Implementing wellness programs and preventive care offerings helps employees stay ahead of their health and minimize the need for more advanced, more costly healthcare interventions.

Examples of wellness programs that businesses can implement include:

• Offering a discounted gym membership to employees
• Providing educational resources on healthy eating and nutrition
• Facilitating positive workplace challenges like step challenges or nutritional challenges
• Educating employees on stress reduction strategies
• Choosing healthcare plans that offer access to telemedicine

Find Affordable and Valuable Self-Insured Plans Through Redirect Health

Self-insured plans offer businesses the chance to save costs and maintain more control over their healthcare plan. With the power to set their own rates and access claim data, self-funded employers can craft or find plans that better fit their employees’ needs and budgets.

Redirect Health plans are self-insured with built-in stop-loss insurance to protect you from unforeseen high costs. With a TPA license in all 50 states, we offer pre-built plans that will reliably meet your business’s needs without a heavy administrative burden on your part.

Explore our small business plans, which are designed to save business costs and empower employees with greater access to quality yet affordable care. Contact Redirect Health today to learn more about how our self-insured plans can support you and your small business.