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. There are two common ways to structure a health insurance plan: fully-insured and self-insured (or self-funded).
The difference between fully-insured vs. self-insured (self-funded) health plans
What is a fully-insured health plan?
A fully-insured health plan is the traditional way to structure an employer-sponsored health plan. How a fully-insured health plan works:
- The company pays a premium to the insurance carrier.
- The premium rates are fixed for a year, based on the number of employees enrolled in the plan each month.
- The monthly premium only changes during the year if the number of enrolled employees in the plan changes.
- The insurance carrier collects the premiums and pays the healthcare claims based on the coverage benefits outlined in the policy purchased.
- The covered persons (ex: employees and dependents) are responsible for paying any deductible amounts or co-payments required for covered services under the policy.
What is a self-insured health plan?
With a self-insured (self-funded) health plan, also known as a section 105 plan, employers run their own health plan as opposed to purchasing a fully-insured plan from an insurance carrier. Employers choose to self-insure because it can allow them to save significantly on premiums. However, self-insuring exposes the company to much larger risk in the event that more claims than expected must be paid. It’s also important for employers to understand the costs of self-insured health plans. How a self-insured health plan works:
- The employer calculates the fixed costs and variable costs for the plan.
- The fixed costs include administrative fees, any stop-loss premiums, and any other set fees charged per employee. These costs might be in the form of salary for staff to manage the program or fees to a third-party administrator (TPA) or software administration service who can handle or automate many management tasks.
- The variable costs include payment of health care claims. These costs vary from month to month based on health care use by covered persons (ex: employees and dependents).
- To limit risk, some employers use stop-loss or excess-loss insurance which reimburses the employer for claims that exceed a predetermined level. This coverage can be purchased to cover catastrophic claims on one covered person (specific coverage) or to cover claims that significantly exceed the expected level for the group of covered persons (aggregate coverage).
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HRAs give employers the cost benefits of a self-insured plan without the management headaches and risk
HRAs benefit employers as follows:
- Similar savings on premiums to traditional self-funded health plans
- Employers, rather than insurance carriers, control costs, as variable costs are capped at a level the employer decides fits their budget.
- Insurance plans are purchased through carriers, which means the employer does not need to purchase stop-loss coverage.
- Insurance carriers handle claims processing, so employers do not need to hire/train staff to do this.
- HRA administration software can automate most day to day tasks, while ensuring regulatory compliance.
The most common types of HRAs are:
- Individual coverage HRA (ICHRA). With an ICHRA, employers offer employees an allowance they can use to purchase their own individual health insurance plan on the Healthcare.gov marketplace or their state exchange. Employers can also choose to cover out-of-pocket expenses like copays. Employers benefit from this approach because they don’t have to purchase stop-loss insurance to mitigate risk and they don’t have to worry about variable costs, as the individual insurance plan handles medical payments and the employer sets fixed allowance amounts, giving them a known potential maximum. Employees benefit from this approach because exchanges typically give them far greater choice than either the one or two options they might get from a fully-insured plan or the single self-insured plan the employer designs.
- Qualified small employer (HRA). Like the ICHRA, a QSEHRA, allows employers to reimburse employees for medical individual health insurance premiums and out-of-pocket expenses. QSEHRAs are the easiest HRA to implement but have limitations. They can only be used by employers with fewer than 50 employees, employers are limited in the amounts they reimburse employees, and they must offer the same reimbursement amount to all W-2 full-time employees (employers can choose to limit the benefit to full-time employees, but if they offer it to part-time employees, they must offer them the same reimbursement allowance as full-time employees).
- A group coverage HRA (GCHRA). With a GCHRA, employers keep their fully-insured health plan, but reduce premium costs by choosing a high deductible plan. They then reimburse employees for copays and out-of-pocket expenses. Employers can set a deductible for the HRA amount that determines when they begin covering expenses. For example, they might have a group health plan with a $6,000 deductible, but start reimbursing employees once they have reached $1,000 in medical expenses. This, in essence, gives employees a $1,000 deductible health plan.
Fully-insured health plans are what most people are familiar with—a traditional group health plan from an insurance carrier. Self-insured plans are funded and managed by an employer, often in an effort to reduce premium costs. However, employers should have a good understanding of the management needs and risks before implementing them. HRAs are an alternate way to self-fund insurance that delivers the cost benefits of self-insured plans without the risk, while increasing insurance options for their employees.
This post was originally published in February 2014. It was last updated 11/16/2020.