An Introduction to Self-Funding: What, Who & How
What is Self-Funding?
In terms of employee benefits, self-funding (also referred to as self-insurance) is a funding mechanism in which an employer funds health care claims independently rather than engaging an insurance company to purchase health coverage for its eligible employees.
There are several different names out there used to describe plan types and structures these days, but a health care plan either fits the category of fully insured or self-funded.
With steady growth in the last four decades, self-funded plans are now the most common type of health plan that workers are enrolled in across the United States. Various sources put this number at nearly 70% and climbing. Nearly all self-funded employee benefit plans are managed through a third party administrator (TPA) firm, an independent organization that assists with overall plan operations, benefit coordination and claims processing.
Who Uses Self-Funding?
From the 1970s to the 1990s, a common belief was that self-funded plans were only viable for large-size companies with hundreds to thousands of employees who needed health insurance coverage.
The idea that a company’s size should be a determining factor in choosing whether or not to self-fund continues to be challenged. The reality is that a combination of factors should be evaluated on a case-by-case basis – including an employer’s financial condition, cash flow, risk tolerance, and the need (or desire) for flexibility in designing a group health plan for its wide-ranging workforce.
Today, the majority of employee benefit plans in the U.S. are self-funded, with a growing number offered by small-sized businesses and public employers. This overall market growth is the result of, in large part, the expansion of stop loss (somewhat like re-insurance) offerings. New stop loss options better fit small- to mid-sized employers’ needs to manage risk, and work to foster closer relationships between carriers and their TPAs.
As businesses face the challenge of finding affordable health insurance year after year, many – of all industries and formats, including public employers – are finding that self-funding can be a smarter and more cost-effective alternative to buying traditional health insurance coverage.
How Are Self-Funded Plans Regulated?
The majority of self-funded health insurance plans are regulated by a variety of federal agencies (government and church plans may be subject to similar state rules, depending on the state’s discretion). The Employee Retirement Income Security Act (ERISA) is the main law that applies to private employer self-funded plans. It is administered by the Employee Benefits Security Administration (EBSA), a division of the Department of Labor (DOL). The drafters of ERISA called it the “ultimate consumer protection” law because of the strong fiduciary duty obligations and transparency reporting requirements. Other federal agencies that regulate self-funded plans include:
- Department of Treasury
- Department of Health and Human Services (HHS)
- Equal Employment Opportunity Commission (EEOC)
Many self-funded plans are not regulated by state-specific mandates. The good news about that? If you have employees working in multiple states throughout the U.S., they can all be covered by the same group health plan without having to adjust your administrative or compliance efforts by location. Self-funding allows greater customization of employee benefits, making it easy to tailor each plan to meet the specific needs of each workforce.
Self-funding has become the most popular type of health plan in the United States as care costs keep rising and affordable health insurance becomes harder to find. Determining if the self-funded plan model and a TPA partnership will be a good fit for your workforce is something that should be considered by many of the organizations that offer health care as a benefit to their employees.
More Information on Self-Funding
Learn more about how self-funding works and the many benefits of these group health plans by reading additional articles within the Self-Funding 101 section in the main menu at the top of the page. You’ll find information on TPA definitions, stop loss basics, considerations for employers and choosing a TPA – along with a separate section about the many advantages of self-funding.