Highlights
- Choosing self-insured vs. fully insured employee healthcare benefits for your small to midsize business can offer a more customizable and affordable approach to healthcare coverage.
- Self-insured – also known as self-funded insurance – gives employers financial control, data transparency, flexible plan designs, and stop-loss insurance as a safety net that protects you from high-cost claims.
- Self-funded insurance offers up to 85% variable costs compared to fully insured’s fixed premiums, guaranteeing cost savings.
- Fully insured carriers assume all the financial risk, but employers with self-funded insurance can mitigate risk with a group captive.
- Self-funding lets you tailor your health coverage to your employees’ needs. It typically offers more flexibility and personalization than fully insured carriers do.
Finding the right health insurance for your small to midsize business (SMB) is crucial for your budget and your employees’ well-being. While many companies go the traditional route with fully insured health plans, they often lack the flexibility that small and mid-market employers need.
Because there is no transparency into their claims data, employers can face big increases at renewal time, have no idea why, and cannot manage these costs proactively. Those on fully insured plans often pay more for benefits they never use, which the insurance company pockets as profit. It all adds up to a frustrating experience, where the employer and the employees are paying more and getting less.
Self-funded health insurance offers a new model — and the promise of a better way — for small to midsize businesses. Self-funding allows for a more tailored, and data-informed approach to managing health insurance costs. When deciding between self-funded vs. fully insured, it’s essential to compare each funding model, including how they work, your responsibilities, and the benefits to your team.
What Is Self-Funded Insurance?
Self-funded insurance, also known as self-insurance, is a type of health insurance in which an employer takes on the financial expense of providing healthcare benefits to employees. Instead of paying premiums to a fully insured provider, self-funding requires the employer to set aside funds to pay for healthcare costs. Administering and paying claims is managed by a Third-Party Administrator (TPA) on behalf of the employer.
Traditionally, self-funding has only been available to large corporations because they have the large numbers to make it work risk-wise. Today, a majority of the Fortune 500 realize the benefits of being self-funded, but more and more smaller companies, from 25 to 1000 employees, are joining in because of the growing popularity of the stop-loss group captive model.
A stop-loss group captive allows smaller companies to join together to share the risk while realizing the benefits of a self-funded plan. Through this innovative approach, smaller companies can afford the savings and benefits Fortune 500 companies have enjoyed for generations.
Being self-funded in a stop-loss group captive offers savings and more personalized, higher-quality care, especially when employers implement cost containment and wellness strategies throughout the year.
Switching to self-funding is also straightforward to implement and manage. The company works with its benefits advisor to put together its team: a TPA to manage and administer and pay employee claims and a Pharmacy Benefits Manager (PBM) to navigate prescription drugs and ensure the best sourcing and pricing. They also select a reinsurance provider for stop-loss insurance to cover high-cost or catastrophic claims.
These players work together seamlessly on behalf of the employer to provide a tailored, more personable, and outcome-focused customer and member experience that outshines the traditional model.
Key features of self-funded health insurance include:
- Direct financial control
- Flexibility in coverage choices
- Potential for substantial cost savings
- Ground-up plan design
- Protective layer with stop-loss insurance
What Is a Fully Insured Health Plan?
Fully insured health plans are the “status quo” way of buying health insurance, where you pay one monthly premium to a carrier and have no visibility into your plan usage. In this model, businesses pay an insurance provider a set premium rate per employee.
This rate usually increases at annual renewal time. It is a “set it and forget it” approach, that sounds good on paper but over time becomes untenable. High increases come every year at renewal, and you can’t manage what you can’t see, so you feel like you have no control.
For instance, the average premium for a fully insured plan has increased by 20% in the last five years. This means you may face increasing expenses year over year. And it is expected to get worse.
The Wall St. Journal recently reported costs for employer coverage are expected to surge around 6.5% for 2024, citing surveys from the benefits consulting firms Mercer and Willis Towers Watson.
The insurance company manages claims per your chosen policy using the collected premiums. Employees often contribute by paying deductibles or copays. Because there is no plan flexibility, you might also pay for unnecessary coverage that doesn’t align with the needs of your employees. That’s actually the business model of fully insured plans — they earn their profits by your overspending on healthcare you don’t necessarily need.
Key characteristics of fully insured plans include:
- Fixed annual premiums
- No direct control over claim payments
- Potential misalignment between premiums and actual health costs
- No customization of coverage specifics
- The insurer bears all financial risks
Cost Implications for Self-Insured vs. Fully Insured Health Plans
In the Roundstone Captive, about 85% of self-funded insurance costs are variable, allowing businesses to use cost containment strategies to lower expenses. This flexibility can lead to savings, especially when you base plan changes on actual insurance claims data.
Fully insured plans have fixed premiums. While they offer predictable budgeting, plans may not always align with the health needs of your team. You may implement a high-deductible plan to cut costs, which might erode employee satisfaction due to increased personal expenses.
When looking at self-funded vs fully insured pros and cons, self-funded insurance often comes out ahead. These plans offer greater cost flexibility and potential savings for employers.
For instance, you only pay for what you use. Anything left over in your claims account, you naturally keep. Plus, you can get back unused premiums in the captive pool at the end of the coverage period. Roundstone, a self-funded insurance provider for small to midsize businesses, has returned $72 million in unspent premiums to businesses since 2003. We return 100% of unused spend, pro-rata, back to members of the captive at the end of the year.
Fully insured plans provide predictability but require trade-offs in employee satisfaction to see meaningful cost reductions. And they can be exorbitantly expensive. Members of Roundstone’s self-funded group captive typically see annual savings of 20% over fully insured plans, a savings that accrues and can be quite substantial over a few years.
In fact, two-thirds of Roundstone clients save enough in their first four years to completely pay for their fifth year of claims.
Risk Management for a Self-Insured Vs. Fully Insured Plan
In fully insured plans, businesses pay set premiums, with insurers managing the risk. The plan is a black box with no visibility into your employees’ claims experience, and therefore no way to optimize it.
If your population would benefit from diabetes screenings, for example, or a way to make a drug more affordable for a member, you would have no insight to make any meaningful changes.
And if claims are lower than anticipated because you have a good year, you would not know this fact, and have no way to recoup the excess that you spent unnecessarily.
Self-funded insurance places risk management in employers’ hands, but a captive provides protection and control.
The group captive model enables you to experience the benefits of self-funding with a shared safety buffer. Under a self-funded group medical captive, companies with only 25 employees can self-insure with the same confidence as a Fortune 500.
Fully insured plans offer a hands-off approach to risk, which translates to a hands-off, cookie-cutter approach to your plan. Self-funded plans provide more control, flexibility, and savings, supported by arrangements like a group medical captive for improved risk management.
Read Medical Captive FAQ’s to learn more about how group captives work.
Flexibility and Customization in Self-Funding
Self-funded plans offer more adaptability for employer-specific needs. Unlike their fully insured counterparts, which are usually offered as preset packages, self-funded health insurance allows you to design coverage tailored to your workforce’s demographics and health profiles.
For instance, a tech startup with younger employees might prioritize maternity or mental health coverage, while a manufacturing firm might emphasize occupational therapy and physical rehabilitation benefits.
Self-funding lets you select vendors and services tailored to employee needs, such as well-being apps or specialized care centers. Additionally, you can encourage using cost-effective services like telehealth by offering lower copays or no deductibles, reducing reliance on pricier urgent care or emergency visits.
Fully insured plans can be rigid. You may pay for seldom-used benefits, like pediatric care in a predominantly middle-aged workforce, or miss out on crucial coverages, such as specialized drug therapies for rare conditions.
Self-funding lets you craft tailored health benefit solutions, reflecting your unique workforce needs. Fully insured plans often present a generic blueprint that may not align with your coverage or budgetary needs.
Self-Funded vs. Fully Insured: What Are Your Responsibilities as an Employer?
In self-funding, you design and manage the plan. However, with Roundstone, this doesn’t mean you’re on your own. Your benefits advisor is truly your partner on the journey every step of the way. A TPA handles claims processing, regulatory compliance, and other operational aspects for most plans.
Importantly, you can choose a TPA based on various factors such as their expertise, scale, track record, and quality of customer service.
Under a fully insured plan, the carrier manages most administrative tasks, from claims handling to regulatory compliance. Your role is to choose an appropriate plan, ensure regular premium payments, and disseminate plan details to employees.
While the administrative burden may be lighter, there’s less room for customization and direct influence on plan operations and cost containment. As an HR executive from one of Roundstone’s clients says, “Managing a self-funded health plan is more meaningful work.”
Read FAQ: What Is Self-Funded Insurance? to learn more about self-funding with Roundstone.
Explore Self-Funded Insurance with Roundstone
ROUNDSTONE is an innovative employee health benefits company. We help small and midsize organizations offer competitive benefits at a lower cost by self-funding health insurance through our group medical captive.
The Roundstone Stop-Loss Captive enables companies to self-insure safely by pooling hundreds of employers together to share risk and save money. With easy onboarding and personalized support every step of the way, the Captive offers control, flexibility, transparency, and returns all savings back to employers where they belong.
We believe in always aligning with the employers’ best interests and remain committed to our mission — quality, affordable healthcare and a better life for all.
See how you can save thousands on your employee healthcare plan with self-funded insurance for small businesses. Speak with Roundstone today to learn more about how to make the switch and start saving.
