Fully-Funded Versus Self-Funded – Which is Best for Your Business?

When you consider how to structure your company’s health insurance plan, you have two options:  Fully-Funded and Self-Funded. Since your business is unique, which option is best for your company? The plans differ based on risk, characteristics, market, and company size.

Fully-Funded describes the traditional structure of a company’s health insurance plan; one in which your company pays premiums to a health insurance company and the health insurance company pays your claims based on the policy purchased. With a fully-funded plan structure, your company will pay premiums for each employee, while the insurance company takes on the risk of providing payment for agreed upon health care. 

Premiums are based on many variables including the number of employees, their general characteristics, including their past use of health care. If the variables change, the premiums across the board will reflect that deviation. In most cases, at year’s end or policy renewal time, premiums increase without warning. 

Self-Funded describes plans that, while alternatively funded, are sometimes offered by traditional health insurance carriers. Many emerging Self-Funded plans are designed for small businesses, though traditionally these plans have been employed by larger companies. These programs are contracted to service administrative concerns such as enrollment, membership changes, customer service, claims processing, billing, reporting, and materials fulfillment, and more. Essentially, the employer in these cases, acts as its own insurer, assuming the risk of providing health care benefits for its employees.

In Self-Funded plans, the employer takes the money which would have been spent on traditional premiums and pays health care benefits on employee claims to the service provider. These plans often contract with a third party, which may be an insurance company, to administer the insurance plan for the employer.  Self-Funded plans are more often utilized by larger companies and can offer varying benefits for various classes of employees – from salaried management to hourly laborers.

Many small businesses choose a fully-funded plan, while larger employers find a self-funded plan meets their needs more effectively. Your business is distinct and regardless of its size, you should consider both options before making the crucial decision of which option is best. With so much to consider when choosing the best insurance plan for your company, you will want to stay tuned for our next blog, “Why is Shopping Around So Important for Your Company’s Health Insurance Needs?”