Traditional vs. Self-funded Health Care
January 8, 2018 | Tina Pelland
In the healthcare industry, one of the most common debates is, “is a traditional or self-funded health care plan better for an organization?”. As an employer, it is essential to understand this, because it will undoubtedly affect decisions for choosing employee benefits.
What is a Self-funded health care plan?
Self-funding health care, also known as self-insuring, is where the employer assumes all of the cost and risk of providing healthcare benefits. Instead of paying a premium to an insurance company to provide coverage, corporations pay for their employee’s medical expenses “out-of-pocket”. These plans typically require partnering with a TPA (Third Party Administrator) or hiring full-time personnel to manage the benefits program.
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Positives of having a Self-funded Healthcare Plan
- No Premiums: There are no premiums to pay when self-funding. If plan participants do not use their insurance, there is no cost. Organizations will typically set aside funds per group member. Still, funds stay with the company if they go unused.
- Federal Regulation: Self-insured policies are under federal regulation. Meaning, companies with locations in multiple states do not have to abide by separate guidelines per state, allowing them to give the same benefit options to every employee, regardless of location.
- TPA: Businesses who choose to self-insure their benefits can also decide to hire TPAs (Third Party Administrators) to manage their health insurance program. Giving employers the insight needed to customize their plan, and peace of mind knowing that their health insurance is under careful watch. Also, using the services of a TPA negates the need to hire more personnel to manage employee benefits.
Negatives of having a Self-funded Healthcare Plan
- Risk: Employers assume all of the risks when it comes to self-funding. Meaning, if employees are in need of high-cost medical services, the employers are on the hook to pay. Plan providers can avoid the risk of catastrophic loss by purchasing a stop-loss policy.
- Not a Quick Fix: Affordability is the most enticing reason why companies make the switch to self-funded. However, customization needs to happen before an organization sees lower expenses, which takes time.
- Time and Energy: Self-funded plans do require more attention, employers must monitor their risk while also customizing their plan. Employers can avoid this disadvantage by enlisting the help of a TPA.
What is a Traditional Healthcare Plan?
Insurance companies provide traditional health insurance, also known as fee-for-service plans or indemnity plans. Plans are pre-structured, giving employers a selection of policies that include different collections of coverages. Employers pay premiums per plan participant and their dependents (if necessary) to the insurance company. In return, employees are provided with healthcare coverage, covering a portion of their medical costs. In a traditional plan, insurance companies hold the risk, as they pay in the case of illness or injury. However, employers pay premiums whether or not employees use the provided coverages.
Positives of having a Traditional Healthcare Plan
- Variety of Coverage: Since plan structures are predetermined, they will usually include a vast array of coverages, meaning that there is more for the employee to use.
- Chronic or Continuous Illness: Traditional plans are usually the better route if employees are dealing with long-term health issues, because of lower deductibles and out of pocket expenses.
- Consistency: Fully insured policy cost and coverage do not vary. Employers have a consistent budget, without the added risk of losing funds. All while employees receive uninterrupted coverage throughout the year.
Negatives of having a Traditional Healthcare Plan
- Premiums: Employers must pay premiums no matter what, even if employees are not using the insurance.
- No Selection of Coverages: The plans provided by insurance companies are not customizable, meaning that the coverages included are there to stay whether employees use them or not.
- Long Wait Times: Traditional plan participants (especially HMOs) usually have longer wait times to see doctors or specialists, especially if the plan requires a recommendation from a primary physician before a patient can see a specialist.
Which one is better, a Traditional or Self-funding healthcare plan?
The most important factor in determining which one an organization should choose is its workforce. If employees are healthy and not using much of their insurance, self-funding may be the right choice. A workforce that makes frequent use of their benefits might be better off with a traditional plan . Employers and administrators can determine which plan is the best fit for their company by researching and studying their workforce. If you need help deciding on a traditional or self-funded plan, Varipro is here to help. Contact us, and we will put you in contact with one of our account managers today!