Benefits Planning 101: The Risks of a Self-Funded Policy

Aug 18, 2021

In our last blog post, we talked about the basics of self-funded policies and their benefits.  Here, we’ll discuss the drawbacks and risks of self-funding to make sure you have all the information you need to make an informed decision. But first, let’s do a quick review.

A Quick Recap: What is a Self-funded policy?

A self-funded benefits plan, or self-funded insurance, is a policy where your company assumes financial responsibility for employees’ and their dependents’ covered healthcare expenses as they arise instead of paying monthly premiums like with traditional health plans. A fully insured plan on the other hand is what many companies opt to do in order to avoid bearing all that risk themselves.

With a traditional, fully insured plan, the insurance company assumes all the financial and legal risk of loss in exchange for a fixed premium paid by the employer. Since in a self-funded plan, the company assumes the risk that an employee will become gravely ill and require costly medical treatment themselves, smaller businesses often shy away from self-funded policies due to financial risk even though they can offer significant benefits.

While self-funded plans can help your business save money on premiums to traditional insurance providers and other administrative fees, they aren’t without cost or risk. Self-funded policies typically include fixed costs for administration and stop-loss insurance fees, not to mention the variable cost of the medical claims.  Let’s take a look at some issues you should consider before deciding on a self-funded plan for your business. 

Risks of Self-Funded Policies

Financial Risk

The primary drawback to self-funded policies is the financial risk to the employer. Not only is the employer exposed to the risk of high losses due to extraordinary claims, but year-to-year expenses are difficult to predict.  There is also the possibility of financial loss due to operational inefficiencies in the administration and processing of claims.  

Legal Risk

The risk of regulatory penalties and lawsuits increases when self-funding due to the potential for errors caused by a lack of understanding.  The world of healthcare benefits is highly regulated and can be difficult to navigate. There is also a higher risk of in-house fraud or abuse in the absence of the specialized oversight of an insurance provider. 

Ensuring Equitable Coverage

When looking at establishing self-funded healthcare plan options within your company, you should be sure that everyone has access without any exclusions that can lead to discrimination against certain groups of people like gender identity or religious beliefs. Because you have control over the products you choose in a self-funded plan, you are at risk of leaving someone out.  

Self-funded insurance plans are a great way for companies to save money and increase their flexibility, but these benefits come at the expense of greater risk. If you’re considering making this switch with your company’s health plan, make sure that an experienced partner is there to help keep employers safe: TEBpros will walk you through whether or not self-funding is right for your business!

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