Managing Insurance Costs by Managing Risk


Rising healthcare costs affect both small and large businesses. As businesses navigate the COVID-19 pandemic and try to trim expenses after the economic shutdown, benefits professionals may consider reevaluating whether to offer a full funded vs. self-funded employee benefits plan.


A fully-funded health insurance plan provides a company with level premiums by basing coverage on a fixed amount per employee. In this type of plan, the company agrees to pay an annual premium and in return, the insurer administers the benefits and pays all claims incurred by the employees. These plans are associated with higher costs because the insurer assumes the risk associated with potential claims. In exchange for this risk, the company forfeits any savings realized if the premiums collected by the insurer exceeds the claims paid out in a given year.


In a self-funded plan, the company contracts with a third-party administrator and pays the claims incurred by the employees. In this model, the employer assumes the risk of insurance claims. Employers protect themselves from catastrophic claims by purchasing a stop-loss insurance policy. Self-funded plans allow companies to better manage premium increases from year to year.

After assessing their tolerance for risk and determining whether they have adequate financial reserves to pay claims, employers can decide whether a fully-funded or self-funded benefit plan is best for their organization.