The core difference: who pays the claims
Every group health plan has to answer one question: when employees and their families use medical care, who pays the bills? There are two broad answers.
In a fully insured plan, the employer pays a premium to an insurance company. The insurer then takes on the financial risk of claims. If employees use more care than expected, the insurer absorbs the cost, and the employer’s costs are generally limited to the premium (which may be adjusted at renewal).
In a self-funded plan, sometimes called self-insured, the employer itself pays the employees’ claims as they occur, usually from company funds. The employer carries the risk that claims will be higher than expected. Because most employers do not want to run claims processing themselves, they typically hire an outside company, often called a third-party administrator, to handle tasks such as processing claims, managing provider networks and answering member questions.
This article is general information, not legal, financial or insurance advice. Rules differ by country and region.
What it looks like in practice
For an employee, the two kinds of plans can look almost identical. You have an ID card, a deductible, copays, a set of covered services and a provider directory. Sometimes the card shows the name of a well-known insurance company in both cases, because in a self-funded plan the insurer’s name may be used for the network and administration even though the employer is bearing the claim risk. The summary plan description or your benefits team can tell you which type you have.
A hypothetical comparison
These numbers are invented to show the idea only.
Suppose an employer expects to spend about $1,000,000 on employee claims in a year.
- Under a fully insured arrangement, the employer pays premiums that include the insurer’s expected claims, expenses and margin, say $1,100,000 across the year. If actual claims turn out to be $1,300,000, the employer still pays $1,100,000 in premiums for that year (though the next renewal may be higher).
- Under a self-funded arrangement, the employer pays actual claims plus administrative fees, say $60,000. If claims are $900,000, the total is $960,000. If claims are $1,300,000, the total is $1,360,000.
So the self-funded employer could come out ahead in a good year and behind in a bad one. In this example the fully insured employer has a more predictable cost, and the self-funded employer has a wider range of possible costs. Real arrangements are more complicated.
Stop-loss coverage
Because a very large claim can be financially dangerous, many self-funded employers, especially smaller ones, buy stop-loss insurance. This is coverage the employer purchases for itself, not for employees. It reimburses the employer when individual or total claims pass a chosen threshold. Employees generally do not interact with stop-loss coverage, and it does not change what the plan owes them.
Why employers choose each approach
Fully insured plans are often attractive because they offer predictable budgeting and shift risk to the insurer, which is helpful for smaller employers. Self-funding may appeal to employers who want more control over plan design, access to claims data in summary form, or the chance to keep savings when claims are lower than expected. Larger employers, with more employees across whom risk is spread, are generally more likely to self-fund, though there are also arrangements designed for smaller groups. Which approach makes sense depends on the size of the group, its financial strength and how comfortable it is with uncertainty. For smaller companies thinking about employer plan selection, it is one of many factors.
What it can mean for employees
Many things stay the same, but a few can differ:
- Regulation. Fully insured plans are generally regulated by state or regional insurance authorities. Self-funded plans are often governed under different, sometimes national, rules, which can affect which mandated benefits apply and where an insurance complaint process begins. Details depend on the country.
- Benefits. A self-funded plan may be designed with more flexibility, so what it covers can differ from a fully insured plan in the same area. Always check the plan documents for covered services and exclusions.
- Appeals. Both kinds of plans generally must provide a way to appeal a denied claim, but the process and the reviewing bodies may differ. If you disagree with a decision, an internal review and external review may both be available, depending on the plan type.
- Employee costs. The funding method itself does not set your deductible or copays; the plan design does.
Questions you can ask
- Is our plan fully insured or self-funded?
- Who administers claims, and who do I call with problems?
- Which rules and appeal rights apply to this plan?
The answers are usually in the summary plan description, and your benefits team can clarify.