Self-Insured vs. Fully-Insured Health Plans

Before explaining the differences between fully-insured and self-insured association health plans, it is necessary to define the terms with which we’re dealing. Both “full-insured” and “self-insured” relate to the funding of medical claims made by the plan’s participants. “Self-insured” is the traditional model of funding where a third-party insurance company takes on the financial risk of paying for medical claims in exchange for premiums paid to it. Self-insured, otherwise known as “self-funded,” retains the risk for paying medical claims and operates the health plan on its own or through the assistance of vendors such as third-party administrators (TPA). The latter would be the more common operational practice except for the largest of employers.

The major differences between self-insured and fully-insured association health plans fall into six main categories:

• Speed of implementation
• Savings
• Benefit design flexibility
• Cash flow
• Financial risk
• Regulation

Speed of Implementation

When comparing self-insured association health plans to their fully-insured counterparts, self-insured can take longer to implement. This is because fully-insured plans not only transfer the financial risk for paying medical claims to an insurance company but also transfers the performance of the day-to-day operations of the health plan as well. A self-insured plan typically needs to vet and engage multiple third-party vendors to perform these operations because the association lacks expertise in areas such as claims management and compliance.

Savings

While both fully-insured and self-insured plans that qualify as large groups can save money compared to health plans in the small group and individual markets, self-insured plans can bring additional savings. These potential savings relate to the fact that self-insured plans may have fewer benefit requirements, do not pay for an insurance company’s profit, and may be able to lower plan administration costs.

Benefit Design Flexibility

Fully-insured plans relying on insurance companies may still find that they may not be able to customize benefits to the degree they’d prefer. Self-insured plans, in contrast, have greater control over benefit design for their association health plans.

Cash Flow

In a fully-insured health plan, the association and its participants pay their premium obligations to the health insurance company every month regardless of the level of medical claims. Premiums in fully-insured plans are normally fixed for a year.

Self-insured plans, in contrast, pay medical claims as they occur. This can improve cash flow but there is still the possibility for claims volatility among members (see the comments on “stop loss” insurance in the next section) that can affect cash flow.

Financial Risk

As mentioned previously, the financial risk associated with paying for future medical claims is transferred to an insurance company in a fully-insured plan while a self-insured plan retains that risk. However, self-insured plans mitigate that financial risk through “stop loss” insurance. Stop loss insurance covers medical claims that exceed a predetermined amount during a coverage period. For more information on the different types of stop loss insurance, see the “Stop Loss Coverage” section within our article “What Is a Self-Funded Association Health Plan?”

Regulations

Even though self-insured and fully-insured are both models to fund a health insurance plan, they may have different regulations applied to them. In general, self-insured health plans are viewed as less regulated than fully-insured health plans. However, regulatory and filing requirements vary by state so state-specific comparisons are more meaningful than national generalizations.

One of the potential differences in regulation at the state level between self-insured and fully-insured health plans concerns mandated benefits. It is possible for a state to mandate a health benefit for a fully-insured health plan but exclude that mandate for self-insured health plans. In such scenarios, the self-insured health plan can increase its potential savings advantage over the fully-insured plan if it chooses not to include the benefit. However, inasmuch as association health plans are employer sponsored coverage for employees, the absence of an important benefit may be rejected in the interests of employee satisfaction and retention.