What is self-funded health insurance?

Employers understand that health insurance is an essential employee benefit. The problem is the price. According to KFF¹, the average annual premiums for employer-sponsored health plans increased by 6% for single coverage and 7% for family coverage in 2024.

A self-funded health insurance plan may seem like the best way to curb spending compared to a costly, fully-insured group health insurance plan. However, this seemingly budget-friendly option comes with financial risk.

In this article, we'll explain how self-funded insurance works and why the individual coverage health reimbursement arrangement (ICHRA) is a better choice for your business.

In this blog post, you'll learn:

• Why employers offer self-insured plans.
• The risks self-funded employers face.
• Why the ICHRA is a more viable option.

How a self-funded health insurance plan works

A self-funded health plan, or self-insured health plan, is a type of insurance arrangement in which an employer takes on the financial risk of providing healthcare benefits to their employees.

Instead of paying premiums to an insurance company, the employer sets aside money to cover employee medical claims expenses directly. They typically use a third-party administrator (TPA) to handle plan administration, employee claims processing, and provider networks.

Pros of self-funded insurance plans

KFF found that 63% of insured employees were in self-funded plans in 2024. Large employers are more likely to offer a self-funded plan because they have a larger employee pool that can mitigate risks. Employers choose to offer self-funded healthcare plans for several beneficial reasons.

Pros:

• Cost control: Employers can potentially reduce healthcare costs with self-funded health coverage. They only pay for the medical claims their employees incur, rather than a fixed premium to a health insurance carrier. If an organization has low benefits utilization, this can create substantial savings.
• Cash flow: Employers retain their funds until medical claims are actually paid out. This can improve cash management and liquidity.
• Transparency: Since employers receive detailed medical claims data, they have a better understanding of healthcare spending and employee health trends.
• Tax advantages: Self-funded plans may offer potential tax benefits, including being exempt from state health insurance premium taxes².

Cons of self-funded insurance plans

While the cost savings can be enticing, it's important to weigh the potential drawbacks of a self-funded insurance plan.

Cons:

• Financial risk: Employers assume all financial risk for providing health benefits to their employees. This can lead to significant claims costs if their employees' healthcare expenses are higher than expected.
• Poor cash flow: Unexpectedly high employee health claims can strain an employer’s cash flow, particularly for small and midsize companies.
• Stop-loss insurance coverage: To prevent cash flow issues, employers frequently purchase stop-loss policies. Stop-loss coverage protects against catastrophic claims. But a stop-loss insurance policy can increase overall expenses, reducing potential savings.
• Administrative responsibilities: Managing a self-funded plan can be complex. It may require additional resources or third-party administrators. Add on administrative costs, and a self-funded option may not be as cost-effective as you think.

How to improve the self-funded experience

In addition to a stop-loss policy, there are other ways employers can enhance the self-funded experience.

They might explore level-funded plans. A level-funded policy blends elements of both fully insured and self-funded health benefit plans. They contribute a set monthly amount to a claims account and also pay a monthly premium for stop-loss insurance coverage. This allows them to share some financial risk with their stop-loss carrier.

Then, there's captive health insurance. With this strategy, several companies team up to self-insure their employee health benefits. By pooling their resources, they can reduce financial risk and have more control over the healthcare budgets.

Why the ICHRA is a better solution for cost savings

If you like the idea of a self-funded health plan, you'll love the ICHRA. It offers the same perks as a self-funded health plan without the financial risk or administrative burden.

Employers use ICHRAs as alternatives to traditional group health insurance. With an ICHRA, employers reimburse employees for the cost of their individual health insurance coverage instead of buying a one-size-fits-all group plan for them.

Here's how ICHRAs provide cost control for employers:

• Employers set a monthly, tax-free allowance for their employees. They only reimburse employees’ premiums and qualifying medical bills up to that amount.
• Employers can customize allowances and eligibility by employee class, age, and family status.
• ICHRAs aren't subject to steep annual premium rate increases like group health insurance plans.
• Unused funds stay with the employer.

To participate in the ICHRA, employees need qualifying individual health insurance coverage. They can purchase an individual plan from a broker, an insurance carrier, or through the Health Insurance Marketplace. This gives them the freedom to choose the health plans that work best for their situations.

Employers can reimburse more than 200 eligible medical expenses with an ICHRA, such as:

• Monthly premiums for individual health, dental, and vision plans
• Doctor visits
• Preventive care
• Over-the-counter medication
• Prescription drugs

How to offer the ICHRA

A new health benefit comes with a learning curve. PeopleKeep by Remodel Health is here to help make the transition easier for you and your team.

Your time is valuable, and we want to save you more of it. With our ICHRA administration platform, you can manage your health benefit in just minutes each month.

Our team of experts eases the administrative burden of offering an ICHRA by:

• Tailoring your HRA to meet the unique needs of your employees.
• Reviewing reimbursement requests from your employees for their eligible out-of-pocket costs.
• Creating your legal plan documents.
• Sending automatic notices to employees on your behalf.
• Providing award-winning customer support when you need it.

Plus, we make shopping for health insurance policies a stress-free experience for your employees. Instead of going to an insurance company or working with a broker, your employees can shop for individual healthcare plans and ancillary benefits right from their PeopleKeep account.

Conclusion

Unlike fully insured plans, where companies pay fixed premiums to health insurance companies, self-funded insurance plans allow employers to assume the financial risk of providing healthcare benefits directly. This can lead to potential cost savings for employers. But they may incur higher costs than expected if their employees require extensive or frequent medical care.

The ICHRA is a safer bet for an affordable healthcare benefit. Employers can customize this benefit to fit their budgets and the specific needs of their employees.

1. KFF 2024 Employer Health Benefits Survey
2. Cigna Self-Funded Health Plans Basics and Benefits