Self-Insurance versus Insured Benefits Plans, What’s Right for You?

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Strategy is a very important part of any benefits plan that is often overlooked either at renewal time or when setting up a new employee benefits plan. Identifying your goals whether it’s attracting top industry talent, recruiting more senior-level staff, becoming a more employee-centric organization or growing a new department is critical to your plan. The employee benefits that you decide to offer become tools which ultimately help you accomplish those objectives.

But when those objectives are set, how do you determine what type of plan is right for you? These days, there are many different options available to clients including traditional insured benefits plans, self-insured benefits plans, flexible benefits plans and sometimes even hybrid versions of these options. While I’ve posted a number of articles about traditional and flexible benefits plans before, here’s a brief overview of what you need to know about self-insured plans.

A High-Level Overview of Self-Insured Benefits Plans and Its Advantages

While there are a few options that we proposed to our clients who are interested in self-insured benefits plan, the most common plans are Administrative Services Only (ASO) plans and Private Health Services Plan (PHSP) plans. An ASO is setup in a way where an employer would pay all the claims submitted by its employees as per a specified plan design, plus an administration and claim fee to the provider. To the employee, the plan structure seems identical to a traditional plan; the true difference is the funding arrangement between the employer and provider. When it comes to a PHSP plan, an employer would make monthly, quarterly or annual contributions to the plan per employee up to a specific total budget (There are many pay-as-you-go arrangement options for employers to consider). The employee would then be able to access those funds for whatever medical and dental coverage they require, as the funds become available. How much is paid out and at what interval depends on the employer’s choice of funding allocations when setting up the plan.

Some perceive self-insured plans as advantageous when they are working with a fixed budget over a specific number of years. Clients also see value in paying for a plan in accordance to its exact usage. Employers can set a firm budget, and offer flexible employee coverage within that budget. If total claims at the end of the year are less than what is budgeted, then the employer is able to save costs. The perceived savings also applies in comparison to insured plans where one would pay the full plan premium regardless of the usage levels.

The Potential Pitfalls of Self-Insured Employee Benefits Plans

The downside to these self-insured benefits plans, specifically for ASO, is that the employer is assuming most of the risk. In case there is a very high medical claim under a self-insured plan, the employer becomes liable for the expense. Additional stop-loss coverage can be applied to self-insured plans which would protect an employer from an anomalous claim that would exceed the pooling amount. For instance, if an employer has a set a pooling level of $10,000, and an anomalous claim comes in for $12,000, the employer would be responsible for the first $10,000 and then the pooling level would insure the rest. In other words, the full “deductible” would have to be paid by the employer which would represent the maximum budget set for the plan.

Under a PHSP plan, a limited contribution per employee could hinder the success of the plan. For instance, a monthly contribution of $100 per month per employee would generally not be able to adequately cover expenses from employees with dependents or those who need specific medical or dental treatment. Unless there is significant capital to invest in this plan upfront in order to allocate full-year contributions per employee, an employer could receive negative feedback with this type of plan.

Is a Self-Insured Plan Really Better than a Traditional Insured Plan?

It depends on the client. Again, if the employer absolutely needs to stick to a specific budget over the course of a few years, this could be an option. Other clients who are experiencing uncontrollable cost increases of their traditional insured plans due to plan abuse (when many employees are submitting claims for every possible benefit offering under the plan) could also use a self-insured plan to alleviate the issue.

However, there are other options to consider if and when both of these cases arise. One option that we like to suggest is a flexible benefits plan which allows the employer to set a specific budget while also providing employees with comprehensive and flexible coverage. (Read more about flexible benefits plans here.) Another option is a setting hybrid plan, which would combine either a traditional benefits plan with a health spending account or a self-insured plan for a specific employee benefit such as dental coverage. (Read how we moved a client to a self-funded dental plan to cut costs.)

It’s Not One Size Fits All, Just Ask a Knowledgeable Employee Benefits Advisor

When you are searching for the right plan for your organization, it’s important to start by defining your objectives. When you have an idea of what you want to do, reach out to a qualified and experience benefits consultant who can advise you on the many options that will help your organization meet your goals. At BenefitDeck, we’re firm believers that when it comes to employee benefits plans, it’s not one size fits all. Many options should be considered, and plans can be tailored to suit your specific needs. If you are interested in other employee benefits plan options or have any questions about self-funded plans, please contact our team. We’re always here to help.

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