A self-funded insurance plan is one where the employer maintains the financial risk in order to provide health care benefits to their employees. So, instead of paying monthly premiums on a fully-insured plan, a self-funded insurance option will pay for any claims out of pocket as they
In most cases, the self-insured employer will set up a trust fund designated for such instances. Each month, the employees and employer will chip in their contributions. This might be a certain percentage of each employee’s monthly pay, which is then met by the employer. Instead of these funds being spent on premiums, they are put into a trust fund that collects interest and avoids certain insurance taxes and regulations.
Employers then rely on a third-party administrator (TPA) to process and handle claims on their behalf. TPAs can also assist with collecting monthly contributions, setting up the trust, contracting preferred provider organizations and their related services, and providing services over the chosen plan.
While this saves on monthly premiums, the potential for expensive claims persists. This can be especially dangerous for smaller businesses or those just launching their self-funded insurance coverage. Fortunately, employers who opt for self-funded insurance can protect against such instances by implementing stop-loss insurance or building up their funds prior to launch.
Nonetheless, there are numerous benefits that make self-funded insurance plans a viable option for many small and medium-sized businesses.