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How Does Self-Funded Insurance Work?

Most companies with employees offer their workers employer-sponsored health insurance at reduced costs. Though many companies subscribe to a group health insurance plan to cover their employees, some companies opt for self-funded insurance plans instead. Self-funded insurance differs from traditional group health plans because it does not require involvement from a third-party insurance company.

  1. How It Works

    • An employer with self-funded insurance operates similarly to an insurance company. The employer will collect monthly payments from employees and deposit the money into a trust fund regulated by the federal government. When an employee files a claim, the employer will draw money from the trust fund to cover the cost. If extra money remains in the trust fund at the end of the billing period, the employer will keep the money to offset future costs.

    Stop-Loss Insurance

    • Self-funded insurance policies may also include stop-loss insurance, which is a policy the employer purchases to cover catastrophic claims. With a stop-loss insurance policy, the employer can set limits on the maximum loss the company will accept, and the insurance company will cover any losses that exceed this maximum. The price of a stop-loss policy increases as the employer's maximum acceptable loss decreases.

    Variations

    • While most self-funded insurance plans include stop-loss insurance, others do not. Employers without stop-loss insurance will not pay as much to implement self-funded insurance. However, employers without stop-loss coverage will not receive assistance in the event of unanticipated loss and will have to pay excess expenses out of pocket.

    Considerations

    • Self-funded insurance policies are more flexible, and employers can customize plans to meet employees' needs. When monthly premium payments exceed the cost of filed claims, the employer can keep the money to use later. However, a self-funded insurance plan is more time-consuming, requires more attention from the employer and involves more risk than a traditional group health plan.

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