Fully-insured vs. self-insured health plans

As medical costs continue to rise, some employers are searching for ways to control expenses without negatively impacting health coverage for employees. That’s why more companies are weighing the pros and cons of implementing a self-funded—or self-insured—health plan instead of offering a traditional, fully-insured group health insurance plan.

In this article, we’ll explore these two common ways to structure a health insurance plan so you can understand each available option.

Takeaways from this blog post:

• Fully-insured health plans involve employers paying a fixed premium to a health insurance carrier for their employees' medical expenses, offering financial predictability but potentially higher costs.
• Self-insured health plans involve employers assuming all financial risk for providing benefits to employees, allowing for more flexibility in plan design and potential cost savings, but also carrying more financial risk and administrative burden.
• Health reimbursement arrangements (HRAs) offer the benefits of a self-insured plan without the financial risk or administrative burden

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 price to a group health insurance carrier for the employees who are enrolled in a health plan, and the company covers those employees’ medical claim expenses.

Fully-insured health plans can be more expensive than self-funded options, but they can also offer more financial predictability and be a more attractive benefit option to employees —a proven way to increase retention. Some potential downsides include higher taxes, possible rate hikes, and tough carrier negotiations.

In a fully-insured plan, 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 company pays medical claims based on the benefit outline, and employees must pay any deductibles or copays required for covered healthcare services under the policy.

Fully-insured plans can be rigid because they’re not fully customized plans. Additionally, insurance companies can use the money collected from premiums however they choose and won’t refund employers for money that isn’t spent on claims.

However, they’re popular because they eliminate the administrative duties and expenses related to a self-insured health plan, and they lower financial risk because the health insurance company has the job of dealing with all claims of employees.

What is a self-insured health plan?

Depending on how much control you want over your organization’s health benefit plan and how healthy your employees are, self-insured plans can come with some of the biggest advantages.

With a self-insured or self-funded plan, you run your own health plan and assume all financial risk for providing benefits to your employees. They're more flexible than traditional, fully-insured plans because they don’t need to align an insurance carrier’s pre-designed plan options, leaving you free to implement a benefit plan design that will meet your employees’ unique needs. Additionally, self-insured health plans can provide you with additional savings on premium costs.

However, they do come with more financial risk and administrative burden, particularly for small employers.

In a self-insured health plan, you're responsible for calculating the fixed and variable costs of the plan. The cost projection should include administrative expenses, 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 of healthcare include medical claim payouts, which can 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 health claims that exceed a set amount. This coverage option can be used to cover catastrophic health claims on one covered person (known as specific coverage), or cover employee claims that significantly exceed the expected level for the group of covered persons (known as aggregate coverage).

Health reimbursement arrangements (HRAs) give employers the benefits of a self-insured plan without all the headaches

If you want the flexibility of a self-insured health plan without financial risk or administrative burden, a health reimbursement arrangement (HRA) might be the answer. An HRA is an alternate but increasingly common type of self-funded health plan where a business owner reimburses employees for qualifying medical expenses.

Because traditional employer health coverage is often too expensive for small employers, HRAs can be a simple and budget-friendly way to offer a meaningful health benefit. HRAs can help you control costs because they’re not subject to annual premium rate hikes like group health insurance plans.

Additionally, they don’t come with the financial risk that other self-funded plans do because they allow employers to set a fixed monthly budget that they won’t exceed.

With an HRA, employers set a monthly, tax-free allowance that employees can use to get reimbursed for their individual health insurance premiums and other eligible out-of-pocket medical expenses. Once employers establish an allowance, you can't reimburse employees 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 according to your determined payout schedule.

To understand the difference between three popular HRAs, we discuss each one below.

Qualified small employer HRA (QSEHRA)

A qualified small employer HRA (QSEHRA) allows employers to reimburse employees tax-free for monthly premium costs, qualifying medical services, and other eligible out-of-pocket expenses. Reimbursements can also be free of income tax if the employee is covered by a minimum essential coverage (MEC) insurance policy.

A QSEHRA is only for employers with fewer than 50 full-time equivalent employees (FTEs). 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 an employer-sponsored 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 headache of administering a traditional group plan.

Individual coverage HRA (ICHRA)

Like the QSEHRA, employers offering an individual coverage HRA (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 the employer. You don’t have to purchase stop-loss coverage to mitigate risk, and you don’t have to worry about variable costs. 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 plan type they want.

Employers of all sizes can implement an ICHRA as their health benefit.

Integrated HRA

An integrated HRA, or group coverage HRA (GCHRA), is for employers currently offering a group health insurance plan that are looking to supplement that plan and offer their employees greater control over their health benefit.

Employers can set a monthly allowance to cover deductibles, copays, and out-of-pocket expenses. Employers can implement cost sharing, allowing them to choose a percentage employees are responsible for paying.

There are more than 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.

Conclusion

A fully-insured health plan is the traditional model of structuring 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 to reduce health insurance costs. While fully-insured plans offer predictability and safety, although at a cost, the benefits of self-funded plans can be more attractive.

HRAs are a self-insured option that deliver the cost benefits of self-insured plans without the additional 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 October 15, 2021. It was last updated on December 28, 2023.