Self-funded health care is an arrangement whereby an employer pays set fees called ‘fixed costs’ (which include administrative fees, stop-loss premiums and any other set fees charged per employee) to an insurance company, but the employer pays the claims costs incurred by the covered persons in the plan instead of the insurance company. The claims costs are the ‘variable costs’ to the employer, because they vary from month to month, depending on the claims activity of the group as a whole.

Typically, in this type of arrangement, an employer does not self-insure 100 or 3% state premium tax, which is another savings element to the employer.

Is a self-funded plan right for your business?

Most experts agree that the ideal size group for self-funding (otherwise known as ASO or Administrative Services Only) arrangements are for groups with 100 or more employees. The idea is that there are more employees in the group to help spread the risk and cost. The more members, the more predictable the forecast of claims experience.

Does your business have a high turnover of employees?

If so, self-funding may work for you as you are not paying a higher monthly premium for employees who may not stay with your company. However, larger employers have to be concerned with COBRA employees, who elect to retain their group coverage after leaving employment. The employer, in a self-funded arrangement, would still be liable to pay any claims for those COBRA employees and their covered dependents for the specified time period (usually either 18 or 36 months, depending on the circumstance of the separation of employment).

Most employers on a self-funded arrangement pay for a third party administrator to process any incurred claims, which is another expense to consider. And above all, an employer must have the reserves on hand to pay any claims that come due, or face lawsuits.

Ask your insurance agent if a self-funding arrangement makes sense for you.