Hassle-Free Health Coverage: Self-Funded Plans

Your employer may have set up a financial arrangement that helps cover employees' health care expenses. Sometimes employers do this and have the health plan administered by an insurance company, but sometimes there is no outside administrator.

A self-funded plan is a program which allows a financially secure employer to assume the risk for health care costs instead of transferring the risk to an insurance company. The employer's funds are used to pay benefits directly to the employees.

Instead of paying insurance policy premiums to an insurer, the employer places a sum of money into a secured account to provide health care benefits, usually with certain limitations.

In essence, the employer has become a "mini-insurer" providing various types or levels of health care.

A self-insured plan is a less expensive way for an employer to provide health care benefits, provided the claims experience is favorable and the employer can realize a good rate of return on the money deposited in the trust account. Employers often choose a self-funded plan to cover their employees' dental expenses because it is less expensive than purchasing a dental plan.

With a self-funded plan an employer, not an insurance company, provides the funds to pay claims for company employees and their dependents. In the event that claims are higher than predicted, a self-funded health insurance plan can be backed-up by a stop-loss contract. A stop-loss contract is designed to limit the employer's liability for claims.

There are two variations of this coverage. Specific stop-loss coverage begins to apply after an individual's medical expenses exceed a predetermined threshold-such as $5,000. Aggregate stop-loss coverage applies when the employer's liability for group insurance claims exceeds a specified amount. The insurance company pays all claims once the specified amount is reached.

A self-funded plan may be an indemnity program which reimburses covered employees for medical care they have received. Or, the employer may provide benefits through the service plan offered under an HMO, or through a company's PPO network.

An insurance company can also be used by a self-funded employer under an "administrative services only" (ASO) contract. Under an ASO agreement the insurance company provides claim forms, administers claims and makes payments to providers; but the employer still provides the funds to make payments. It's easy to confuse an ASO contract with traditional insurance-but they aren't the same thing.