When employers want to provide health coverage for their workers, they basically have two options: a self-insured plan — also known as a self-funded plan — or a fully-insured plan. This article will explain what self-insured health insurance is and how it differs from fully insured coverage.
What is self-insured health insurance?
Self-insured health insurance means that the employer pays the employee’s claim with its own money. Most self-insured employers contract with an insurance company or independent third-party administrator (TPA) for plan administration, but the actual claim costs are covered by the employer’s funds.
Full coverage means that the employer purchases health insurance from a commercial insurance company, and the insurance company then assumes the risks associated with employee health claims.
According to a 2021 Kaiser Family Foundation analysis, 64% of U.S. workers with employer-sponsored health insurance are in a self-insured plan. Most businesses with 200 or more employees are self-insured, and 82% of covered employees in these businesses are enrolled in a self-insured health plan. However, among businesses with fewer than 200 employees, only 21% of covered employees are enrolled in a self-insurance plan (up from 13% in 2018, but slightly lower than in 2020).
This makes sense because large businesses are typically those that can afford to take the risks associated with employee medical claims. But for capable employers, self-insurance can save money and have the option to tailor a health plan to meet the needs of both employer and employee.
Insurance companies and TPAs that contract with self-insured businesses are increasingly offering products that make it easier for small businesses to self-insure, including stop-loss (also known as reinsurance) insurance that reimburses employers in the event of a major claim, and horizontal funding insurance plans that eliminate the fluctuations in claims costs that self-insured plans may face.
How self-insurance plans are regulated
Fully insured health insurance plans are mostly regulated at the state level, although various federal minimum standards (contained in laws such as HIPAA, COBRA, and ACA) also apply.
Self-insured health insurance plans are not subject to state insurance laws and oversight. Instead, they are regulated at the federal level by various provisions of ERISA (Employees Retirement Income Security Act) and other federal laws such as HIPAA and ACA.
Each state has its own laws and regulations related to health insurance, and state-regulated plans sold within states are overseen by state insurance commissioners. But state-based laws and regulations only apply to fully-insured plans—they don’t apply to self-insured plans.
So, for example, when a state makes rules requiring health plans to cover vasectomy or infertility treatments, those requirements don’t apply to self-insured plans. Two-thirds of people with employer-sponsored health insurance are in a self-insured plan.
This can sometimes lead to frustration and confusion, especially when one is in a state where a new insurance mandate or law is causing significant excitement and media coverage, and residents with self-insured plans may not be aware that the new rules don’t apply to their coverage.
Regulations that apply to self-insurance plans
However, there are some basic federal minimums that do apply to self-insurance plans. This includes HIPAA rules that prohibit employer-sponsored plans from denying eligible employees (or dependents) based on medical history, and ACA rules that prohibit plans from imposing waiting periods on pre-existing medical conditions.
The Pregnancy Discrimination Act applies to all health plans with 15 or more employees, including self-insurance plans. Among various other nondiscrimination provisions, the law requires employer-sponsored health plans to include maternity coverage (small employers are not required by law to provide coverage, but if they do, they must include maternity benefits).
Self-insurance plans are also subject to COBRA (assuming the group has 20 or more employees), This means that eligible employees and their dependents have the option to continue their coverage if a life-changing event would result in termination of coverage.
The Families First Coronavirus Response Act requires nearly all health plans, including self-insurance plans, to waive cost-sharing for COVID-19 testing during the COVID-19 public health emergency, meaning enrollees don’t have to pay anything for office visits or the test itself.
A new federal law designed to protect consumers from most unexpected balance billings goes into effect in 2022 and applies to self-insured and fully-insured plans. States have moved to limit accidental balance billing, but state rules apply only to fully-insured plans; new federal rules provide protection for consumers in states that haven’t acted, as well as those with self-insurance.
Some Affordable Care Act provisions apply to self-insured plans in the same way they apply to fully-insured plans. This includes:
- Maximum out-of-pocket expenses (unless the plan is grandfathered).
- Assuming the plan offers dependent coverage (this applies even if the plan is grandfather’s), dependents are allowed to remain in the plan until age 26.
- If a member’s claim or pre-authorization request is denied, the non-grandfather program provides access to internal and external review processes.
- ACA’s Employer Authorization Requirements. Therefore, if an employer has 50 or more full-time employees, the insurance they provide must be affordable and provide a minimum value. Otherwise, the employer may be penalized.
Provisions that do not apply to self-insurance plans
As mentioned above, state-based laws and regulations generally apply only to fully-insured plans. Self-insured plans are not subject to these requirements, although self-insured plans may sometimes choose to accept them.
There are also some federal requirements that do not apply to self-insured plans. Some examples are:
- Medical Loss Rate Rule do not want Applies to self-insured plans.
- Self-insurance plans do not have to include ACA Essential Health Benefit coverage (except preventive care, which all non-grandfather plans must cover—no cost-sharing).any essential health benefits they get Do Insurance cannot place annual or lifetime caps on benefit amounts. This is the same rule as a large group health insurance plan, and most self-insured plans are also large group plans. Some employers who would otherwise have to purchase coverage in the small group market have opted for self-insurance, which means they can choose not to include all essential health benefits in their coverage (all but four states, “large group” refers to 51 or more multiple employees; in California, Colorado, New York, and Vermont, this means 101 or more employees).
- The three-to-one premium limit (up to three times the premium for older enrollees) does not apply to self-insured plans. They also don’t work with large group plans, and most self-insurance plans are offered by large employers. If small employers choose to self-insure, they are not subject to the ACA’s limit on premium amounts that vary by age.
third party management
Most self-insured employers work with a third-party administrator (TPA) for claims, network negotiation, and overall administration of the plan (a pharmacy benefit manager is a type of TPA).
TPA services can be provided by insurance companies or independent companies. Self-insurance plans can rent network agreements from established insurers, often as part of the services offered by the TPA.
Because of the TPA and network agreement, people in a self-insured health plan may not know they are in a self-insured plan. Since an enrollee’s plan documents and ID may state Blue Cross, UnitedHealthcare, Cigna, or Humana, it is natural for enrollees to assume that the insurance company listed on their ID is insuring them and covering the group potential claims risk.
During the COVID-19 pandemic, the federal government enacted legislation requiring nearly all health plans, including self-insured plans, to fully pay for COVID-19 testing during the COVID-19 public health emergency.
Shortly thereafter, numerous insurers across the country announced that they would also waive COVID-19 cost-sharing treatwhich is obviously much more expensive than testing. (Most of these provisions expire in early 2021, around the time a COVID vaccine is widely available.) But for these company-managed self-insurance plans, it’s important to understand that the waived cost-sharing applies only if employers opt-in.
This is an example of a potential point of confusion, as people with self-insured plans administered by major insurance companies don’t always know that their plans are self-insured.
If the employer is self-insured (which is usually the case if the employer has more than 200 employees), it is actually employer i.e. take on claims risk – the insurance company listed on the ID is only paid for managing claims, managing network protocols, etc.
As mentioned above, employers may also pay insurance companies for stop loss insurance that kicks in if a claim reaches a certain point (you can think of it as an insurance policy), or is used for horizontal funding arrangements along with Over time, this contributes to claims settlement costs. With the blurred lines between fully insured and self-insured plans, it’s not surprising that even some small employers who use horizontal funding agreements don’t know their plans are self-insured.
Self-insured health insurance is the most common method used by large U.S. employers who, instead of buying health insurance from an insurance company, use their own money to pay for their employees’ medical bills. But in most cases, they contract with a third party (usually a reputable health insurance company) to manage the insurance.
The rules and regulations that apply to self-insured health plans are not always the same as those that apply to fully insured health plans. Employees often don’t know if their health plan is fully or self-insured.
If you work for a large company, your health insurance is likely self-insured. Your employer may have chosen to create a very robust benefits package to use as a recruiting and retention tool, and your coverage may be more generous than if your employer purchased coverage from a health insurance company.
But it’s also important to understand that state-based health insurance rules don’t apply to self-insured plans. Depending on where you live, this could explain why your health plan doesn’t cover services that your state requires your health plan to cover.