Why Do Large Businesses Often Choose Self-Funded Plans?

There are many health insurance products, but the two most common types are fully insured and self-funded plans. Small businesses typically choose fully insured plans, while self-funded plans are more common among larger companies. Although this arrangement holds for many companies, it's not a hard and fast rule, and you may be able to benefit from either option.

What Makes Self-Funded Plans Attractive to Large Companies?

Self-funded plans are all about trading greater risk for more flexibility and potentially lower costs. When an employer uses a self-funded plan for their employees, they agree to cover healthcare costs directly. In these cases, the group plan provider acts as an administrator, but they bill the employer for incurred healthcare costs at the end of the year.

Effectively utilizing a self-funded plan requires an employer to keep cash to meet end-of-year healthcare needs. This approach has many benefits for large companies with significant reserves. For example, the company can use those reserves to generate revenue through interest, which wouldn't be possible if healthcare premiums were going directly to the insurer.

There may also be accounting benefits to this approach for many large employers. Since the insurer only collects costs at the end of the year, there's no impact on month-to-month profits from insurance premiums. Maintaining control of healthcare reserves also means that the employer can receive any unspent money at the end of the year.

Why Are Self-Funded Small Business Plans Less Common?

Healthcare costs can be unpredictable, so self-funded plans tend to favor companies with large reserves and a steady cash flow. Small businesses tend to avoid these plans because of the added risk and the potential for a large bill at year-end. As a result, these plans can cause problems for smaller employers, especially if an employee faces unexpectedly large healthcare bills.

Level-funded plans are one potential alternative for small business owners who wish to enjoy the benefits of a self-funded group plan with less risk. These plans have two key differences compared to traditional self-funded plans: set monthly premiums and stop-loss insurance. The employer pays a regular premium with these plans instead of paying an end-of-year balance.

Level-funded plans give up some of the advantages of controlling the healthcare reserve, but they also reduce employer risk. The premium covers stop-loss insurance that caps the maximum yearly payout, but the plan holder still receives a refund if yearly costs fall below the expected amount. Some employers use level-funded plans to test the waters before starting a self-funded plan.

When choosing a plan for your business, you'll need to carefully consider your risk aversion, cash flow, and long-term goals for employee healthcare. While self-funded group plans may be more common for large businesses, it's worth understanding how they work so you can make the decision that's best for your unique circumstances. Reach out to a professional for more information about group health insurance. 

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