Fully Insured VS Self Insured Medical Plans There are two basic types of approaches to medical insurance. A business can purchase a fully insured product or self insure. A fully insured product is what it says. The business pays a premium to an insurance company or HMO each month to provide the medical coverage to its employees. The premium remains the same whether there are claims or not. At the end of the year, the insurance company keeps all the premiums regardless of claims experience. A self insured product is the opposite. The company purchases stop loss insurance to cover claims over a specific amount and pays the rest of the claims out of cash. If the claims are low so is the over all cost. For example, I use insurance companies that offer a hybrid product. It's basically a fully insured product with a large specific deductible per employee per year. It also offers a maximum cost each month for budgetary reasons. The specific stop loss is $25,000 per employee. That means the first $25,000 of claims of each insured is paid 100% by the employer. After $25,000 the insurance company picks up the claims. The insurance company processes all claims just as a fully insured company would and pays the claims either from the employer's account of their own account, depending on the level of the claims. The employer pays a fixed premium for the administration costs and the stop loss coverage.  How do these plans work? On the average a company can expect to have one real good year with claims, one bad year, and three average years. So what is the advantage of to a plan like this. There are several: Rate increases are mostly based on claims paid by the insurance company. The first $25,000 of claims, which covers all but the worse claims or sickest employees are paid by the employer. Frequency of claims does have some influence on rate increases, but over a five year period rate increases should be lower than a fully insured product. The money that would have been sent to fund a fully insured product, essentially paying the claims in advance are keep in the employer's account until needed. Claims are expected to have a three month time lag, meaning the employer does not pay for a claim until three months after it is incurred. This allows the cash flow advantage.  Self insured plans are not governed by state laws, they fall under the national regulations of ERISA. In Minnesota, that can be a savings of 15% or more. The state mandates coverage of things that do not have to covered the same or at all with an ERISA plan. In the pure sense, using a TPA (Third Party Administrator) to establish a self insured plan, an employer could custom make a plan. Personally, I do not use TPA's, I prefer regular insurance companies. Their plans are off the shelf with the needed coverage included in the packages. There is far less chance for forgetting to include coverage. After all, the purpose of a medical plan is to cover the employees adequately not save money. If you just want to save money, don't offer a plan. The self insured companies, normally, are national companies. The local HMO's in Minneapolis do offer self insured variations of their plans. However, this appears to not be their specialty, fully insured plans are. The advantage of a national carrier over a local HMO in Minneapolis is the risk pool. We are experiencing poor claims experience in the Minneapolis area. The local HMO's entire risk pool is in the state of Minnesota, and mostly in Minneapolis. A national company has its risk pool spread all over the country. Just because claims experience in poor in Minneapolis doesn't mean it is in Columbus, Ohio. Who qualifies for a self insured medical plan? Each carrier that offers such plans have their own requirements, but the plans work well for employers with more than 50 employees. One carrier I work with has a hybrid plan for employers with 25 or more employees. How are the plans designed? I use regular insurance companies that offer medical plans with the same coverage as employees expect. Variations are offered in co-pays and deductibles. How are the costs projected? I work backwards to arrive at an expected cost. I use the existing fully insured plan, take that premium and ask the companies to figure out what plan those costs would buy. What this does is fix a maximum, worse case on last years costs. What are the negatives to a self insured plan? It pays to have a broker and a company with lots of experience assist you in designing the right plan. You'll want the proper medical coverage and total cost. Once a self insured plan it set up it may be difficult to change to another plan. The claims incurred but not paid don't go away. Suppose the claims incurred in a given month exceed the budget set. For example, the total of claims that have come in are more than $25,000. Those claims are carried into the next month. That month's maximum are the normal monthly maximum plus all prior months that were not paid. The report below was taken from an actual summary of an employer with 250 employees. Month Monthly Attachment Level Cumulative Attachment Level Benefit Payments Cumulative Benefit Payments In Month Change in Experience Deficit Cumulative Change In Experience Deficit Benefit Payments Transfer Amount Cumulative Benefit PMTS Transferred Amount In Month Fee Total Tranfer June 38,854 38,854 56,161 56,161 -17,307 -17,307 38,654 38,854 17,738 56,593 July 51,084 89,939 54,185 110,347 -3,100 -20,407 51,084 89,939 24,079 75,164 Aug 50,788 140,728 55,037 165,384 -4,248 -24,656 50,788 140,728 24,679 75,467 Sept 52,854 193,583 39,143 203,528 14,711 -9,945 52,854 193,583 25,503 78,358 Oct 42,499 236,083 39,823 243,352 2,675 -7,269 42,499 236,083 27,521 70,021  In the above example, The Monthly Attachment Factor = The budgetary maximum amount of claims the employer is liable for that month The Cumulative Attachment Level = The accumulative liability for the months Benefit Payments = What the claims paid that month actually were Cumulative Benefit Payments = The accumulative benefits payments Benefit Payments Transfer Amount = Monies used to pay the benefits Cumulative Benefit Payment Transfer Amount = Accumulative benefit payments In Month Fee = Administrative costs Total Transfer = Benefits paid plus Administrative fee paid that month by the employer. Note the cumulative attachment level increases each month. The employer is liable for $38,854 in claims in the month of June. The actual benefit/claims were $56,161. The excess is carried over to the next month. If the benefits paid that month exceed the monthly attachment point/amount So is a minimum or fully self insured plan a good idea? That answer depends on several key points. Is the employer fiscally responsible & profitable. It is much easier to just pay a fixed medical premium. The business owner must have an interest in knowing how his medical plan works and wants to maximize his cash flow. How bad is the claims history of the employees. Continual bad claims history will provide little savings with a minimum premium plan. The cost savings are the cash flow of paying the claims three months after incurred instead of prior and the likely hood that over a five year time span claims are expected very good one year, average three years and bad one year. Working with a broker that understands how these plans work. Someone that can work with your staff to train them in how to best utilize such a plan. Someone that knows the marketplace and products available. You have enough employees to justify such a plan. The magic number usually recommended is 100 employees. There are plans that will go down to as few as 35. There must be enough premium to justify the plan, otherwise a fully insured plan works better.