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Commercial vs. Self-insured Healthcare Plans

Oct. 9, 2012
Small Business
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Self-insurance plans are exempt from many state insurance regulations, including regulations mandating that insurance policies offer employees an opportunity to design alternative benefits packages, receive some money and benefits from employee wellness programs, receive certain preventative care benefits and be protected from lifetime benefit caps.



Commercially Insured Self-Insured
Who pays healthcare costs? Employer pays premium to health insurance company; insurance company pays healthcare costs Employer pays all healthcare costs
Who does administrative work? Insurance company Employer, or the employer hires a third party administrator
Who regulates the healthcare plans? State and federal governments Federal government; plans are exempt from many state insurance regulations

Self-insurance plans can be more economical for employers.  By cutting out the third party, employers are able to reduce the average cost of healthcare.  However, the downside is that self-insurance is much riskier for employers than commercial plans.  If an employee gets seriously ill, employers with self-insurance plans have to pay the cost of treatment, which may be in the millions.  Because of the increased risk of self-insurance plans, they have traditionally only been used by large companies with the resources and stability to cover these risks; however, recent developments have altered the situation.

Recent controversy

After the Affordable Care Act was announced, some insurers began offering “self-insurance” plans in which employers sign up for stop-loss policies, which limit the amount that employers must pay in the case of large medical expenses, and thereby reduce the risk of self-insurance plans.  In these plans, businesses are not responsible for medical claims above the stop-loss limit, which can be as low as $10,000.  The insurer pays the remainder.  By calling these stop-loss programs self-insurance, insurers are exempt from certain state mandates (as listed in the above section).  However, some critics argue that the stop-loss limits in place mean that these are not technically self-insurance policies.

Critics say that these firms are trying to target small companies with young, healthy workers, only offering this care to low-risk employees.  By selecting only the healthiest groups, these firms decrease the diversity of the remaining customer base and may cause premiums to rise for those customers. Furthermore, they are taking advantage of a loophole in the Affordable Care Act.  The Affordable Care Act states that an insurer must pay 80% of the revenue from premiums out in claims for group or individual policies—but stop-loss plans are exempt from this rule, allowing the insurer to make more in profits and provide less in coverage.

Proponents, however, argue that these new insurance policies are simply responding to a new demand for low-cost healthcare for businesses that are now required to insure their employees under the Affordable Care Act.  Rather than taking advantage of a loophole, proponents believe that these plans offer a much-needed alternative to purchasing expensive healthcare plans or engaging in risky self-insurance plans for small businesses.

The California Legislature is likely to debate this issue in December.

Medical person image from Shutterstock