Some employers (usually larger) operate their own health insurance plan as opposed to purchasing a "fully-insured" plan from an insurance carrier. This is called self-insuring because the employer assumes a large amount of the risk.
When an employer self-insures their group health plan, they typically pay a third party administrator (e.g. an insurance company or TPA) to manage their plan (i.e. process the claims, provide a network of doctors and hospitals, etc). In this situation, the employer keeps the premium and pays the actual cost of the claims (and administration) themselves. Employers choose to self-insure because it allows them to save the profit margin that an insurance company adds to its premium for a fully-insured plan. However, self-insuring exposes the company to much larger risk in the event that more claims than expected must be paid.
Because of the large risk associated with self-insured plans, many companies (especially smaller ones) choose to partially self-insure their group health plan. Specifically, they self-insure the predictable losses of the health plan and purchase a stop-loss policy from an insurance company to cover the unpredictable losses. In this scenario, the stop-loss policy generally pays for losses above a specified amount (or limit) per employee. The mentality is very similar to offering an HRA with a high deductible health plan.
Illustrative Example: ABC Manufacturing (1000 employees)*
ABC Manufacturing's group health insurance is partially self-funded with a Third Party Administrator (TPA). They purchased a stop-loss policy covering claims in excess of $20,000 per employee per year that costs them $50,000 ($50 x 1,000) per month. The stop-loss policy caps ABC Manufacturing's exposure at $20,000 per employee per year. ABC Manufacturing's total risk exposure for the year is $20,000,000 (1,000 x $20,000) in claims. They predict that total claims for the year will total $5,000,000 which equates to an average premium of approximately $467 per employee ($5,000,000 / 1,000 / 12 + $50).
*This example is meant as an easy-to-follow illustration for educational purposes only and is not necessarily indicative of actual costs in the market.
See related article: How HRAs can work for a self-insured company.
