Your employer groups have a couple options when it comes to insurance. They can opt to be fully-funded or self-funded. But—how do you know what type of plan fits each client?

What Is a Fully-Funded Insurance Plan?

A fully-funded insurance plan is an employer-sponsored health plan in which the insurance carrier assumes the risk of high-cost bills. In this plan, the employer pays the carrier a fixed rate, AKA a premium, for the year despite the actual cost of the bills.

What Are the Costs and Fees Associated with Being Fully-Funded?

The only cost for a fully-funded insurance plan is the fixed premium rate. This rate is nonrefundable and will not change, no matter how expensive or inexpensive the medical bills are throughout the course of a plan year. Unlike the self-funded option, there are no admin or TPA fees associated with being fully funded.

The Pros of a Fully-Funded Insurance Plan

Being fully insured is the most predictable and risk-free option. If a company does not have the financial resources to take the risk of a catastrophic claim, a fully insured plan is a conservative option. This is what will make the biggest impact for employer groups:

• Fully-funded plans are a safe option for small companies.
• The employer only has to pay a fixed rate for the whole year, without having to worry about any additional fees or costs.
• The carrier assumes the risk; if a catastrophic claim occurs this is covered by the insurer, not the employer.
  
  

The Cons of a Fully-Funded Insurance Plan

Depending on the group's demographic, the claims costs could end up being very low. For example, if the group has employees primarily in their 20s and 30s, the odds of high-cost medical bills arising are slim. In this case, the company is paying a higher amount in premiums than it would be if it just paid the bills.

• There is a chance the costs of the actual claims will be less than what the company pays in premiums.
• They are unable to customize their health plans. 
  
  

Choosing the right option is crucial, so let’s walk through a scenario. 

Scenario 1: This group is a small accounting firm based in Pennsylvania.

• Company has 20 lives.
• Most employees are aged 45 and above.
• Company doesn’t have much money left over in its budget.

The employees in this group are middle-aged, so there are more medical risks whether it’s heart disease, or a few more trips to the eye doctor. With a small company, generally there are fewer financial resources. If one of the employees happened to have a heart attack, this claim would be difficult for the company to cover. With that being said, this company is a prime example of a group that should be fully funded. 

What Is a Self-Funded Insurance Plan?

A self-funded plan is a plan in which the employer assumes the financial risk for providing health care benefits to its employees. Self-insured employers pay for claims out-of-pocket as they are presented instead of paying a premium to an insurance carrier for a fully insured plan. 

Think of it this way—a self-funded company is like the company being its own insurer. They assume the risk that the insurance company would if they were fully funded. This might sound risky, that’s because it is. You as the broker should evaluate the group’s situation carefully when recommending which option is best. 

What Are the Costs and Fees associated with being fully funded?

Self-funded plans are more complex when it comes to costs.

• Claims payments: This is the baseline cost to be self-funded. The employer group will pay the medical claims as they come.
• Stop-loss premiums: When a group is self-funded, stop-loss insurance is a layer of protection in the event of an abnormally large claim. The company will pay a premium for stop-loss insurance to have a safety net in the event of of a catostrophic claim.
• Admin, service, and TPA fees: Additional fees for connecting with a third party for set up and administration will also be included.
  

Employers have much more control over the health plans they offer if the opt to be self-funded. Additonally, if the health claims are lower than what the premium payments would be for a full-insured plan, the group could save a lot of money. The group is able to customize its plan based on the needs of its employees. 

• The group will not be subject to state health insurance premium taxes.
• The group will only pay the actual health claims. 
  
  

The Cons of a Self-Funded Insurance Plan

Although being self-funded may end with the reward of saving money in premiums, the risk you are taking is a possible catastrophic claim coming through. If a company is not financially prepared for the possibility of a large claim, this could be detrimental to the company, depending on its size and financial situation. 

• There is a sizable risk associated with being self-funded.
• Large claims could have a group paying more than they would if they chose to be fully funded.
  
  

Let’s look at another scenario. 

Scenario 2: This group is a growing tech company in Florida.

• Company has 1,000 lives.
• The majority of their employees are in their 20s and 30s.
• Large amount of financial resources.

This employer group is a very large company with employees that probably have very few medical expenses such as visits to the doctor or medications. A company in this situation, with this demographic would benefit from being self-funded because the amount the company would spend in premiums would most likely be much greater than the actual medical costs. 

How to Determine the Best Option for Your Groups

There are a few key questions to consider when determining what is the best plan for each client. 

• Are they financially able to take on the risk of a huge claim?
• What is the general health of the group’s employees?
• How much money could they be saving in premiums? 

The answers to these questions will tell if they are able to take on the risks that come with being self-funded. If they have the financial resources to take this risk, and could be saving a lot of money on premiums, being self-funded may be a good option.

Additional Resources: 

• Brokers’ Corner Podcast—watch and subscribe to the Brokers’ Corner podcast, which dives into the topics that affect your agency and industry and identifies strategies so you can protect and grow your book of business 
• BerniePortal Brokers’ Council—a council of benefits brokers from across the country that advises BerniePortal on industry concerns, trends, and the ways technology can best support their agency and employer groups 
• BerniePortal for Brokers—leveraging technology to increase your agency valuation and support your employer groups is easier than ever with BerniePortal’s software solution, built for brokers by brokers