How Large Companies Act as Their Own Insurance Company (And Why It Saves Them Millions).
My Company Fired Aetna and Became Its Own Insurer.
I work for a large company. For years, our health insurance was with a major carrier. Then, our company switched to a “self-funded” plan. I was nervous, but our HR director explained it simply. “We are now acting as our own insurance company,” she said. “Instead of paying a huge, fixed premium to Aetna, we are just going to pay the actual medical claims of our employees directly.” This move saves the company millions of dollars a year in profits and overhead that they used to pay to the insurance carrier.
Self-Funded vs. Fully-Insured: Is Your Employer Paying a Premium or Paying Your Actual Claims?
The Two Different Ways Your Company Can Pay for Your Healthcare.
This is the fundamental difference. With a fully-insured plan, your employer pays a fixed, monthly premium to an insurance company (like Blue Cross) for every employee. The insurance company then pays the claims. With a self-funded plan, your employer does not pay a premium. They collect your payroll deductions and use that money, along with their own funds, to pay your family’s actual medical bills directly as they come in.
The “Stop-Loss” Insurance That Protects Self-Funded Companies from a Catastrophic Claim.
The Safety Net That Makes Self-Funding Possible.
The biggest risk of being self-funded is a single, catastrophic claim, like a premature baby with a million-dollar NICU stay. To protect against this, self-funded employers buy a special type of insurance called “stop-loss” insurance. This policy acts as a safety net. It says that if any one employee’s claims exceed a certain high-dollar threshold (e.g., $100,000), the stop-loss insurer will step in and pay the rest. This protects the company from a devastating, budget-busting claim.
Why a Self-Funded Plan Gives Your Employer More Flexibility in Plan Design.
Our Company Designed a Plan That Was Perfect for Us.
Because my company is self-funded, they are not tied to the “off-the-shelf” plan designs offered by an insurance carrier. This gives them incredible flexibility. They were able to create a custom-designed health plan that was a perfect fit for our employee population. They added benefits for wellness and mental health that we really valued, and they were able to be much more creative in their cost-containment strategies. It gives them the freedom to build a better, more tailored benefit plan.
The Financial Risk and Reward of Self-Funding for an Employer.
A Good Year is Great. A Bad Year is Brutal.
The trade-off of self-funding is clear. The reward is that in a healthy year, when your employees don’t have a lot of large claims, the company saves a massive amount of money. They get to keep the profits that the insurance company would have made. The risk is that in a bad year, with several large, unexpected claims, their healthcare costs can be much higher and more volatile than they would have been with a fixed, fully-insured premium.
How to Tell if Your Company Health Plan is Self-Funded (Hint: Look at Your ID Card).
The TPA is the Key.
It’s often hard to tell if your plan is self-funded because it will still have a familiar logo, like Aetna or Cigna, on the ID card. But here’s the secret. The insurance company is not acting as the insurer; they are just acting as the “Third-Party Administrator” (TPA). They are being paid a fee to process the claims. If your ID card or plan documents say your plan is “administered by” a major carrier, it is a very strong clue that you are on a self-funded plan.
Why State Mandates Often Don’t Apply to Self-Funded Plans (The ERISA Loophole).
The Federal Law That Overrides State Law.
This is a critical legal distinction. Fully-insured plans are regulated by state insurance laws. This means they must cover any benefits that the state mandates (like IVF treatment or acupuncture). Self-funded plans, however, are governed by a federal law called ERISA. This federal law preempts most state-level mandates. This “ERISA loophole” means that a self-funded employer is not required to cover many of the benefits that a fully-insured plan in that same state would have to.
The Cash Flow Advantage That Makes Self-Funding So Attractive.
Paying for What You Use, Not What You Might Use.
With a fully-insured plan, an employer has to pre-pay for the entire year’s worth of risk through a high, fixed premium. With a self-funded plan, the employer holds onto their own money and only pays for the claims as they actually occur. This provides a significant cash flow advantage. They get to keep their own money working for them, earning interest, instead of sending it to an insurance company’s bank account.
For Small Businesses, Fully-Insured is the Only Option. For Large Ones, Self-Funding is a No-Brainer.
A Question of Scale and Risk Tolerance.
For a small business with only 20 employees, the risk of a single catastrophic claim is too high. They cannot afford the volatility of self-funding. A fully-insured plan with its fixed, predictable premium is the only sensible choice. For a large corporation with 5,000 employees, the law of large numbers is on their side. Their claims are much more predictable. For them, the cost savings and flexibility of a self-funded plan make it an absolute no-brainer.
The Two Different Worlds of Employer-Sponsored Health Insurance.
Understanding the Engine That Drives Your Benefits.
Whether your employer’s plan is fully-insured or self-funded is a fundamental distinction that drives everything about your benefits—the cost, the design, and the regulations. It is the invisible engine under the hood of your health plan. While you may not notice a difference in your day-to-day experience, understanding which system your employer uses can give you a much deeper insight into why your benefits are structured the way they are.