A Comparison of Self-Funded and Insured Health and Welfare Plans
By Mark Johnson, Ph.D., J.D.
Employee welfare benefit plans can be either fully insured, or self-funded. This article explains and compares the differences between the two types.
Most companies have a fully insured employee benefit plan, where the employer arranges for health coverage from an insurance company. The insurance company assumes the risk for payment of claims based on an actuarial analysis of the policy terms and covered group. The insurance company collects a monthly premium, which is typically shared by the employer and the employee, and pays for claims based on the policy terms. The covered employee is responsible for any deductibles and co-payments.
Under state law, insurance companies are regulated and are subject to rules governing benefits, network adequacy, prompt payment of claims, etc. Although fully insured plans in the private sector are still covered by ERISA they are also subject to state insurance regulation. While the state cannot tell an employer what the provisions must be in its ERISA plan, it can tell insurance companies what must be in policies they are authorized to sell; in essence back door regulation.
In a self-funded healthcare plan an employer provides health and other welfare benefits to employees with its own funds. For self-funded plans, the financial risk falls on the employer, with employee cost sharing arrangements similar to the insured plan, i.e. deductibles, co-payments and employee monthly contributions (the latter are functionally the same as premiums). The cost of the plan consists of benefits actually paid to health care providers, administrative fees, stop-loss premiums if the employer elects on an aggregate or individual basis to shift financial responsibility to an insurance policy after a trigger is met, and other variable costs.
Employers usually hire an administrator to process the claims. Self-funded plans are generally not subject to state laws and regulations, which means that state-mandated benefits, state prompt payment rules, or standards of network adequacy do not apply. Normally employers contract insurance companies or third party administrators (TPAs) to keep track of contributions, process claims, manage enrollment and other administrative functions. This can be confusing because a self funded plan may look like insurance but it is not; and the claims processor is functioning as a TPA, not as an insurance company. Therefore, it and the plan are not subject to state regulation.
Another form of health plan is the Multiple Employer Welfare Arrangement (MEWA). In a MEWA, a group of unaffiliated employers pool their contributions in a self-funded benefits plan for their employees. The contributions are based on the number of employees that work for each employer and the estimated costs associated with the plan. This arrangement is a way for smaller employers to get group health and other benefits for their employees.
Supporters of MEWAs typically represent the MEWA as an employee benefit plan covered by the Employee Retirement Income Security Act (ERISA) and, therefore, exempt from state insurance regulation under ERISA’s broad pre-emption provisions.
By working around the state insurance reserve, contribution, and other requirements applicable to insurance companies, MEWAs typically market their coverage at a lower rate than those of regulated companies. This is primarily why a MEWA is an attractive alternative for small businesses who find it difficult to obtain affordable health care coverage for their employees. In reality, however, a number of MEWAs have been unable to pay claims as a result of insufficient funding and inadequate reserves.
Sometimes MEWAs are operated by individuals who drain the assets through excessive administrative fees and embezzlement. Since 1983 a MEWA that constitutes an ERISA-covered plan is required to comply with the provisions of Title I of ERISA applicable to employee welfare benefit plans, in addition to state insurance laws and regulations.
Contact ERISA Expert Dr. Mark Johnson
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