Self-insured and fully insured policies are two very different approaches to employer-sponsored group medical plans. With a self-insured policy, the player sets up a plan that pays for insurance claims as they arise. With the more common fully insured plan, the employer pays regular premiums to the provider in exchange for guaranteed payment of benefits on claims.
A main advantage of a self-insured plan is customization. Employers pay only for the specific health care needs of employees rather than purchasing a general coverage plan. Self-insured plans are regulated more clearly by federal law, according to the Self-Insurance Institute of America. Because regular premiums are not paid, the employer can preserve cash to use for paying company debt or investing in growth opportunities. Also, the employer saves money over time assuming total claims paid are lower than premiums would have been. There are also state tax advantages with self-insured plans.
Self-insured plans make less sense for smaller organizations. All it takes is a few employees with major health issues for the costs of paying claims to exceed the money saved on premiums. Employers also bear more responsibility in encouraging employees to only use care as needed and to opt for generic prescriptions when possible to save money. This can lead to tension between management and employees. Budgeting also is complicated, as claims are more difficult to predict that consistent premiums. The company should set aside a conservatively estimated amount to cover claims each month or quarter.
Fully Insured Pros
With a fully insured plan, the employer has fewer potentially devastating risks of extreme health care costs. It also can negotiate with health insurance providers to come up with the best rates possible. Claims are managed by the insurance provider and medical care provider, which leaves the employer out of the mix. This also removes some of the burden on employers to aggressively promote low-cost utilization. Some employers also ask employees to pay a portion of fully insured plans to trim costs.
Fully Insured Cons
The biggest drawback of a typical fully insured plan is the potential that you spend more money on premiums for all employees than you would to pay the costs of claims by some. You also have to negotiate rates and terms with group providers on an annual basis. Fully insured plans commonly are regulated by state laws on required inclusions, terms and communication. This makes it more difficult for employers to understand and communicate coverage benefits and requirements to employees. Employer tax obligations are also higher, the Self-Insurance Institute of America notes.
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