FAQ: What is a Self-insured Group Health Plan?

Written by: PeopleKeep Team
Originally published on September 11, 2009. Last updated October 26, 2020.

self insured group health planSome 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.

The Comprehensive Guide to the Small Business HRA

Originally published on September 11, 2009. Last updated October 26, 2020.


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