What Is Self-Funding and How Does it Work?

Concept

Self-funding health plans, also known as self-insured or self-funded plans, are a type of health insurance arrangement where the employer takes on the financial risk of providing healthcare coverage to its employees.

The employer sets up a fund:

The employer establishes a fund to cover the healthcare costs of its employees. This fund can be funded by the employer's own resources or through employee contributions.

Employee healthcare expenses:

When employees visit doctors, hospitals, or other healthcare providers, their medical expenses are paid from the employer's fund. This can include doctor visits, prescriptions, surgeries, and other healthcare services.

Stop-loss insurance:

To protect themselves against extremely high healthcare costs, employers often purchase stop-loss insurance. This insurance kicks in if an employee's medical expenses exceed a certain threshold, ensuring that the employer is not responsible for catastrophic expenses.

Cost control:

Employers have more control over the design and management of the health plan, allowing them to customize benefits, network options, and cost-sharing arrangements. They can also implement wellness programs or negotiate directly with healthcare providers to control costs.

Employee contributions:

In some cases, employees may be required to contribute to the self-funded plan through payroll deductions. These contributions can help fund the healthcare expenses and cover administrative costs.

Claims administration:

The employer or a third-party administrator handles the processing and payment of healthcare claims, ensuring that employees receive the necessary reimbursement for their medical expenses.