The Disadvantages of Self-Funded Insurance

According to Meritain.com, self-funded health insurance is when a company chooses to pay for employee healthcare out-of-pocket instead of paying monthly premiums to an insurance carrier. As of 2006, Meritain also claims that 55 percent of companies within the U.S. either partially or fully self-fund health insurance for their employees. While self-funded insurance certainly has advantages, it carries with it a few disadvantages, as well.

Small Businesses

• According to Meritain.com, only 13 percent of businesses with fewer than 200 employees choose to partially or completely self-fund. While small businesses should still explore the option, it's hard to argue against such a low statistic. Many small businesses find the risk involved and cash flow required make this route a non-option. Such a plan may also require a dedicated administrative staff specifically to deal with insurance issues, which may be out of the question for many small or starting businesses.

Cash Flow

• Before considering self-funding a company must have the cash flow necessary to deal with this type of plan. Many companies choose partial self-funding with stop-loss coverage. When a specific claim or all claims together reach a certain limit a company may have stop-loss insurance in which an outside insurer will take over. While these plans help, a company still needs to either regularly have cash coming in or a reserve tucked away for the big claims. Aside from simply being able to get the money, a company must have it in a timely manner so the employee can get the medical help they need when they need it.

Claim Fluctuation

• When a business is fully funded by an outside insurance company, they have a set premium. Fully-funded companies know how much they'll have to pay the next time the bill comes. When a company chooses self-funding, however, they are responsible for providing all of the services the insurance company would. While one month may be relatively inexpensive, a number of employees could have costly doctor's bills next month. While a company can somewhat plan for this by having a large amount of money set aside for expensive months, they simply wouldn't have to deal with it if they were fully funded through an insurance company.

The Waiting Game

• The big benefit behind self-funding is the supposed cost savings. It stands to reason that doing something yourself is cheaper than hiring somebody else to do it, but Meritain.com warns that it commonly takes a minimum of three to five years for the benefits to fully manifest because of the cyclical nature of claims. While companies can certainly save money with a smart self-funding strategy, it's certainly not for everybody.