As healthcare costs continue to rise, employers are eagerly searching for ways to control costs without negatively impacting their employees’ health coverage. That’s why more companies are choosing to set aside funds to pay for the healthcare needs of their own employees instead of offering a traditional group health insurance plan.
Either way, employers setting up a health plan need to consider both the type of health plan to offer and how the health plan will be structured.
In this article, we’ll explore the two most common ways to structure a health insurance plan, fully-insured and self-insured so you can understand all the options you have available to you.
What is the difference between fully-insured and self-insured health plans?
What is a fully-insured health plan?
A fully-insured health plan is the traditional route of insuring employees. Employers pay a fixed premium to an insurance carrier that in turn covers employees’ medical claims. Fully-insured health plans are typically more expensive, but they can save you money in the long run by providing great benefits to your employees—a proven way to increase retention. Other potential downsides include higher taxes, potential for rate hikes, and tough carrier negotiations.
In a fully-insured plan, you pay a premium to an insurance carrier. The premium rates are annually fixed based on the number of enrolled employees you have in the plan each month and will only change if the number of employees changes. The insurance carrier pays claims based on the benefit outline and employees must pay any deductibles or copays required for covered services under the policy.
Fully-insured plans can be rigid because they prevent you from customizing your health plan completely, but they’re popular because they eliminate the administrative duties and expenses related to a self-insured health plan. Your risk is lowered because the insurance carrier has the job of dealing with all employee claims.
What is a self-insured health plan?
With a self-insured, or self-funded, health plan, you run your own health plan and assume all financial risk for providing benefits to your employees. Self-funded plans are more flexible than traditional, fully-insured plans because they’re less regulated and give you the opportunity to design a healthcare plan to meet your employees’ unique needs. Additionally, self-insured health plans help you save significantly on premium costs.
In a self-insured health plan, you calculate the fixed and variable costs for the plan. These costs include administrative fees, stop-loss premiums, and any other set fees. This can also include staff management fees, third-party administrator fees, or software administration fees. Other costs include healthcare claim payouts which vary from month to month depending on submissions from employees and their dependents.
To reduce the risk that comes with self-insured plans, you can implement stop-loss or excess-loss insurance which will reimburse you for claims that exceed a set amount. This coverage can be used to cover catastrophic claims on one covered person (AKA specific coverage), or cover claims that significantly exceed the expected level for the group of covered persons (AKA aggregate coverage).
Health reimbursement arrangements (HRAs) give employers the benefits of a self-insured plan without all the headaches
An HRA is an alternate type of self-insured health plan where employers reimburse employees for qualifying medical expenses. Because traditional group health insurance is often too expensive for small employers, HRAs can be a simple and budget-friendly way to offer health benefits. HRAs are fixed in cost, so they’re not subject to annual premium rate hikes like group health insurance plans.
With an HRA, employers set a monthly tax-free allowance that employees can use to get reimbursed for their individual health insurance premiums as well as other eligible out-of-pocket medical expenses. Once an allowance is set, employees can’t go over that limit.
To get reimbursed, employees submit proof of an eligible expense, typically in the form of a receipt. Once the expense is approved, the reimbursement is sent out according to your determined payout schedule.
To understand the difference between the three most popular HRAs, let’s discuss each of them below.
Qualified small employer HRA (QSEHRA)
A QSEHRA allows employers to reimburse employees tax-free for health insurance premiums and other out-of-pocket expenses. Reimbursements can also be free of income tax if the employee is covered by a minimum essential coverage (MEC) policy.
A QSEHRA is only for employers with fewer than 50 full-time employees. Employers are also bound by contribution limits and they must offer the same reimbursement amount to all W-2 full-time employees. Finally, a QSEHRA can’t be offered at the same time as a group health insurance plan—you’ll need to pick one or the other.
With a QSEHRA, employers can offer a tax-efficient health benefit without breaking the bank or incurring the hassle or headache of administering a traditional group plan.
Individual coverage HRA (ICHRA)
Like the QSEHRA, employers offering an ICHRA give their employees an allowance they can use to purchase their own individual health insurance plan on the Marketplace or their state exchange. This is a plus because exchanges offer far more options than they might get from a fully-insured plan. Employers can also choose to cover out-of-pocket expenses like copays and deductibles for tax-free reimbursements.
An ICHRA takes the burden of administering a health plan off of the employer. You don’t have to purchase stop-loss insurance to mitigate risk and you don’t have to worry about variable costs, as the individual insurance plan handles medical payments and your set fixed allowance amount makes the benefit cost-effective.
With the ICHRA, employers can decide which employees are eligible to participate based on employee classes, set their monthly allowances, and get back to managing their business while employees get to choose the plans they want.
Group Coverage HRA (GCHRA)
A GCHRA is for employers currently offering a group health insurance plan that are looking to reduce premium costs and gain greater control over their health benefit. Employers can set a monthly allowance to cover deductibles, copays, and out-of-pocket expenses, further supplementing their group health plan. Along with the deductible, employers can choose a percentage that employees are responsible for.
There are over 200 IRS-regulated expenses that are eligible for reimbursement, such as various medical, dental, and vision expenses. This flexibility helps employers attract and retain employees by laying a traditional group plan alongside a more customizable supplemental option to fill in the gaps with tax-free reimbursements.
A fully-insured health plan is the traditional way to structure an employer-sponsored health plan and is the most familiar option to employees. On the other hand, self-insured plans are funded and managed by an employer, often in an effort to reduce premium costs. While fully-insured plans offer predictability and safety, although at a cost, the benefits of self-funded plans are becoming more attractive.
HRAs are a self-insured option that deliver the cost benefits of self-insured plans without the risk and hassle, while increasing plan options for your employees. Schedule a call with one of our personalized benefit advisors to see why an HRA is the right option for your organization.
This article was originally published on November 16, 2020. It was last updated October 15, 2021.