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Rising costs and increased instability in the health care marketplace has prompted more employers of all types and sizes to consider self-insurance as a solution to provide quality health benefits to their workers and dependents.

This solution can offer many advantages but like any significant business decision it should be given due consideration, including appropriate consultations with knowledgeable business advisors as self-insurance may or may not be the best fit for your organizations. This section of the SIEF website is designed to help familiarize employers on what they need to know to effectively evaluate the self-insurance option.

Specific topics include:

How self-insurance serves employers’ purpose to maintain healthcare benefit plans for their employees and dependents.

The increasing costs of human capital, and in the United States especially, the increasing costs of employee health care, makes it increasingly difficult for employers big and small to be competitive in the global market. Self-insured health benefits have long been a major part of the solution to this problem, and for this reason continue to thrust itself into the spotlight.

Some employers seem to consider self-insurance as no more than a complicated and obscure health benefits financing option, and simply choose to buy a benefits policy from one of the big commercial carriers and not consider their options. This may seem like the simple choice, but it also leaves the employer at the mercy of the carriers’ premium pricing and limited benefits design options. It also gives the employer little or no information about care costs or administrative performance, and little or no ability to see whether or not the coverage is really right for its employees and their dependents.

For employers who want a better health benefits mousetrap, self-insurance may be a much better choice. In fact, self-insured plans are more common than many think, and provide coverage to about 60 million individuals. There are good reasons for this. While self-insurance does give an employer valuable tax advantages, the real value of a self-insured plan is that it can be a powerful vehicle for lowering overall healthcare costs while offering better benefits, avoiding commercial insurance premium inflation, and implementing more effective claims management.

A self-insured plan is simple enough to set up, and though it does require capable advisors and administrators, the self-insurance industry has a deep bench. The crucial decision that an employer must make is to allocate funds to pay healthcare claims for its employees and their dependents (“plan participants”). The employer’s funding commitment isn’t open-ended, of course, but is capped by stop-loss insurance. An employer that maintains a plan might perform its own claims processing and other plan administration, but more often it’s more cost-effective to contract with a third party administrator (“TPA”) which is already set up to do it.

Within this self-insured framework an employer can exert a much greater degree of control over its health plan, and its design and administration, than an employer who simply buys on the commercial market. State and some federal coverage mandates typically do not apply, and by law the courts are required to defer to most of the claims determinations of almost all self-insured plans. Administrative costs and fees are not simply bundled into premiums but may be scrutinized and negotiated, and the employer receives data about the actual costs of both administration and care.

This last point may be particularly important. Access to claims information under a self‐insured model allows employers to begin to analyze the health conditions, and in particular the high cost chronic conditions, their plan participants experience. Analysis of this information allows for targeted programs which can not only significantly reduce health care costs for the plan, but can improve participants’ health. Employers simply do not have the same opportunity with fully-insured plans; obtaining detailed claims information is challenging, if not impossible, because of privacy concerns, and perhaps even more significantly, because the carriers consider it their proprietary information.

Self-insurance therefore allows an employer to establish and maintain health care management programs which provide a means to both (1) identify and help participants suffering from high-cost health conditions manage them effectively, and (2) implement healthy life styles to help avoid high-cost health conditions in the first place. Each of these in turn reduces costs, sometimes now and certainly in the future.

Of course, this kind of strategy requires participant involvement. Participant education is essential to help them become wise health care consumers, and participants must have the information they need to ask questions, understand answers, review options, and discuss costs. Once again, the ability to understand the conditions which are causing the most problems for participants can help target the right educational strategies.

Benchmarking plan performance also becomes possible. It is always wise to see how you compare to the competition and the market in general, to see if your programs are effective and identify opportunities for improvement. However, it is even more important to beat your own trends and improve cost management over past experience. Tools such as “dashboards” for plan performance reporting make this kind of review relatively quick and easy, and identify drill-down research opportunities when issues are identified.

Most employers who buy commercial healthcare insurance face rising premiums and shrinking insurance capacity, and self-insurance may be a better option than many currently realize. Financial executives, risk managers, brokers, and other industry professionals need to have an understanding of self-insurance and related concepts to help identify opportunities for use of this valuable financial vehicle. They can then help employers identify self-insurance as an option when its adoption is likely to help preserve and enhance their ability to provide their employees and their dependents with better targeted, more cost-effective health care. Combined with the tax benefits, greater flexibility in plan design, and greater administrative transparency, this is likely to prove a valuable alternative for many employers who haven’t really considered this option.

Who self-insures?

Self-Funding By Industry Type

Transportation/Communications/Utilities – 80%
Manufacturing – 68%
State/Local Government – 67%
Finance – 64%
Retail – 63%
Healthcare – 60%
Wholesale – 51%
Agriculture/Mining/Construction – 43%

(Source: Kaiser/HRET Survey of Employer-Sponsored Benefits 2011)

How to determine if your organization is a good candidate for self-insurance.

Companies considering self-funding should conduct a feasibility study. This study should include a risk analysis and a cash flow analysis to determine if the level of risk associated with self-funding is acceptable and if the company has monetary resources to set aside to compensate for potential future loss and management resources to implement a self-funded plan.

The analysis should consider the following factors:

Specific advantages of self-insurance.

Potential claims-related cost savings – Unspent claims funding is retained by the self-funding employer. For those fully insuring those funds remain with the insurance company.

Greater control of plan design – Self-funded employers can customize their plans to meet specific needs of their employee population. The employer decides what benefits to offer (consistent with benefits mandated by the Patient Protection and Affordable Care Act (PPACA, if not a grandfathered plan), employees’ financial responsibilities, and how much risk it assumes. Plans governed by ERISA are not subject to state benefit mandates.

Ability to manage risk – Self-funded employers have the ability to control expenses through their claim payment/claim negotiation policy.

Risk transfer – Self-funded employers can control the amount of risk assumed through prudent purchase of stop-loss insurance, formation of a captive, etc.

Maintenance of reserves/improved cash flow – Self-funding employers no longer pre-pay insurance companies for coverage. While funds must be reserved for claims payments, self-funding employers can utilize the money to generate additional income.

Lower plan administration cost – Typically, 15% to 20% of premium payments to large insurers go for plan administration and insurer profits. TPAs and large insurer ASOs fees are much lower.

Reduced premium taxes – State health insurance premium taxes range from 1.5% to 3.5% depending on the state. Only the excess-loss coverage premium – a much lower amount - is considered taxable for self-funded plans.

Elimination of state mandated benefits – As they are governed by federal legislation (ERISA), self-funded plans are not required to offer state mandated benefits, potentially reducing plan cost.

Ability to contract with providers and provider networks – Self-funding employers can contract with the providers and networks that best suit their employees’ needs rather than having to accept the providers and network offered by the insurance companies.

Access to claims data – Access is readily available to aid in decision making and planning. Self-funding employers receive monthly reports detailing medical claims and pharmacy costs. This information may not be available for some employers that fully insure.

Ability to manage “cost drivers” – "Cost drivers" are high cost, high risk chronic condition enrollees. Once identified, they can be better managed, reducing claims costs long-term.

Ability to make plan changes/plan flexibility – Self-funding employers are no longer restricted to making plan changes on an annual basis. They are able to make them whenever necessary to deal with changing market conditions. Self-funding gives the employer the ability to add essential benefits, eliminate coverage for non-essential services, and move people to or away from specific providers.

Cost stability – Year-to-year self-funding employers no longer have to deal with ever increasing rates from insurance companies.

Specific disadvantages of self-insurance.

Financial risk assumption – Self-funding employers are responsible for the payment of their obligation for claims for services covered in their plans. Employers purchasing stop-loss insurance are responsible for payment of these obligations up to the point when the specific or aggregate stop-loss coverage goes into effect.

Increased management involvement in plan design – Along with greater control of plan design comes the need for greater management involvement in plan design and modification.

Increased administrative responsibility/legal liability – A self-funded plan must be administered internally by the employer or by a TPA or ASO. Even employers retaining a TPA or ASO must provide oversight. The Department of Labor (DOL) has interpreted the failure to implement an efficient administrative system as a breach of fiduciary duty.

Unpredictable cash flow – Claims and claims dollar obligations may vary widely month to month. While funding based on historical claims experience and actuarial projects can increase predictability, monthly obligations may exceed the predictions by significant amounts. ERISA requires that all clean claims (those with no errors and for which no additional information is requested) are to be paid within 30 days of receipt.

Asset exposure – Self-funding employers could bear any liability resulting from a legal action against the plan.

Potential for an adverse experience – Poor claims experience leads to increases in the cost of specific and aggregate stop-loss coverage. This can eventually result in self-funding becoming uneconomic for the employer.

Requires a long-term commitment – Given the up-front cost and the ongoing costs, it may take as many as three to five years for the employer to reap the benefits of self-funding.

PPO discounts may be lower – Because the number of covered lives for the self-funding employer will be far fewer than for an insurance company, less of a discount may be offered by a preferred provider organization (PPO).

How self-insured group health plans are regulated.

Regulatory Structure for Self-Funded Group Health Plans

Offering a self-funded group health plan to your employees and their dependents can be one of the most rewarding decisions you can make as an employer, and the regulatory structure of a self-funded group health plan is not as arduous as you might imagine. In fact, the regulatory structure allows you to design a benefit program to meet the needs of your organization.

Although health insurance is typically regulated by the states, the Employee Retirement Income Security Act (ERISA), a federal law that recently celebrated its 40th anniversary, places the regulation of self-funded group health plans primarily under federal jurisdiction. ERISA has far reaching implications that limit how states regulate self-funded group health plans. In fact, ERISA preempts state laws allowing employers to design their benefit program without regard to state insurance laws and state mandated benefits.

The preemption doctrine derives from the Supremacy Clause of the Constitution which states that the "Constitution and the laws of the United States...shall be the supreme law of the land...anything in the constitutions or laws of any State to the contrary notwithstanding."  This means that any federal law--even a regulation of a federal agency--trumps any conflicting state law.

Section 514 of ERISA provides that ERISA supersedes any and all state laws insofar as they relate to any employee benefit plan. ERISA § 514(a). The breadth of this provision is clear in the definition of “state laws” which includes “all laws, decisions, rules, regulations, or other state actions having the effect of law, or any state.” ERISA § 514(c)(1). State is defined as “a state, any political subdivision thereof, or any agency or instrumentality of either which purports to regulate, directly or indirectly, the terms and conditions of employee benefit plans covered by ERISA.” ERISA § 514(c)(2).

Section ERISA § 514(b)(2)(A) contains a “savings clause” which provides that nothing in ERISA “shall be construed to exempt or relieve any person from any law of any state which regulates insurance, banking or securities.” However, ERISA § 514(b)(2)(B), the “deemer clause” qualifies that savings clause by providing that no employee benefit plan shall be deemed to be an insurance company or other insurer, bank, trust company, or investment company for the purpose of state regulation.

Enacted in 1974, in part, the goal of ERISA was to protect the interests of participants and their beneficiaries in employee benefit plans and over the years, significant legislation has amended ERISA to do just that. We have seen, inter alia, COBRA, HIPAA, WHCRA, GINA, just to name a few, and most recently the passage of the Patient Protection and Affordable Care Act (PPACA).

ERISA is enforced by the United States Department of Labor (DOL) and sets minimum standards for the administration of most self-funded group health plans. The Employee Benefits Security Administration (EBSA) is the agency of the DOL responsible for administering and enforcing the fiduciary, reporting and disclosure provisions of Title I of ERISA. However, the administration of ERISA is divided among the DOL, the Internal Revenue Service of the Department of the Treasury (IRS), and the Pension Benefit Guaranty Corporation (PBGC).

Although ERISA’s preemption applies and coverage is exempt from state regulatory oversight for the majority of self-funded group health plans, which provide benefits for millions of Americans across the United States, ERISA does not cover group health plans established or maintained by governmental entities, churches, plans which are sold directly to individuals or maintained solely to comply with applicable workers compensation, unemployment, or disability laws. ERISA also does not cover plans maintained outside the United States primarily for the benefit of non-resident aliens or unfunded excess benefit plans.

What you need to know about being a plan fiduciary.

A “plan fiduciary” is a crucial role in plan administration which must be taken seriously. Plan fiduciaries are responsible for making informed decisions for the benefit of plan members and the preservation of plan assets. A failure to do so can be a basis for a court reversing claims determinations. It can also make the plan fiduciary personally responsible for losses or harm caused by that failure.

The US Department of Labor describes a plan fiduciary as follows:

The Employee Retirement Income Security Act (ERISA) protects your plan's assets by requiring that those persons or entities who exercise discretionary control or authority over plan management or plan assets, have discretionary authority or responsibility for the administration of a plan, or provide investment advice to a plan for compensation or have any authority or responsibility to do so are subject to fiduciary responsibilities. Plan fiduciaries include, for example, plan trustees, plan administrators, and members of a plan's investment committee.

Plan fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants and their beneficiaries and assume authority and responsibility to make benefit determinations based on the terms of the benefit plan. These responsibilities include:

The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. This responsibility requires the plan fiduciary to act prudently in making decisions, which means that decisions must be properly informed and follow the plan documents. Fiduciary decisions, and the information and reasoning used to make those decisions, should be properly documented so that there is a good record that the decision was prudently made, in case the decision is challenged. For instance, in hiring a plan services provider, a fiduciary may want to survey a number of potential services providers, asking for the same information and providing the same requirements. By doing so, a fiduciary can document the process and make a meaningful comparison and selection.

Following the terms of the plan document is also an important responsibility. The document serves as the foundation for plan operations and fiduciary determinations. Employers as well as plan fiduciaries need to be familiar with their plan document, especially when it is drawn up by a third-party service provider, and periodically review the document to make sure it remains current. For example, if a plan official named in the document changes, the plan document must be updated to reflect that change.

Plan fiduciaries must also avoid conflicts of interest. In other words, they may not engage in transactions on behalf of the plan that benefit parties related to the plan, such as other fiduciaries, services providers, or the plan sponsor. This may require careful decision-making sometimes. For example, a decision to pay claims at less than the billed rate may be prudent for preservation of plan assets, and so benefit all plan members. However, this same decision might be construed as not necessarily in the interest of the individual plan member whose claims are being paid. In cases like this it will be particularly important to have good documentation of an informed, prudent decision-making process which followed the plan documents.

Employer group health plans can be structured in a variety of ways, which affect who has fiduciary responsibilities and authority. However, the key to determining whether individuals or entities are fiduciaries is whether they are exercising discretion or control over the plan. Using discretion in administering and managing a plan or controlling the plan’s assets makes that person a fiduciary to the extent of that discretion or control. Thus, fiduciary status is based on the functions performed for the plan, not just a person’s title. This means that a person can become a fiduciary without really knowing it, just by making the kinds of decisions a fiduciary makes (for example, decisions about claims appeals).

A number of decisions are not fiduciary actions but rather are business decisions made by the employer. For example, the decisions to establish a plan, to determine the benefit package, to include certain features in a plan, to amend a plan, and to terminate a plan are employer business decisions not governed by ERISA. When making these decisions, an employer is acting on behalf of its business, not the plan, and, therefore, is not a fiduciary. However, when an employer (or someone hired by the employer) takes steps to implement these decisions, that person is acting on behalf of the plan and, in carrying out these actions, may be a fiduciary.

Knowing what a model self-insured group health plan looks like.

Coming Soon

Hear real stories from actual self-insured group health plan sponsors.

Coming Soon

The role key business partners play in helping organizations in establishing and operating self-insured group health plans.

Key Business Partners for Self- Funded Employer Groups

An Employee benefits broker or consultant with expertise in specific areas of insurance/benefits is a critical part of a self-funded plan.

Choosing a self‐funding broker - First decide on the characteristics you want in a broker:

Role of broker

A third-party administrator (TPA) is an organization that processes insurance claims or certain aspects of employee benefit plans for a separate entity. This can be viewed as "outsourcing" the administration of the claims processing, since the TPA is performing a task traditionally handled by the company providing the insurance or the company itself. Often, in the case of insurance claims, a TPA handles the claims processing for an employer that self-insures its employees. Thus, the employer is acting as an insurance company and underwrites the risk. The risk of loss remains with the employer, and not with the TPA. An insurance company may also use a TPA to manage its claims processing, provider networks, utilization review, or membership functions. While some third-party administrators may operate as units of insurance companies, they are often independent.

Insurance companies offer similar services under what is frequently described as "administrative services only" or "ASO" contracts. In these arrangements the insurance company provides the typical third party administration services but assumes no risk for claims payment.

TPAs or ASO carriers can assist with:

Pharmacy Benefit Manager (PBM) is a third party administrator of prescription drug programs. They are primarily responsible for processing and paying prescription drug claims. They also are responsible for developing and maintaining the formulary, contracting with pharmacies, and negotiating discounts and rebates with drug manufacturers.

Preferred Provider Organization (PPO) is an entity that provides health care services with utilization review through providers that are otherwise independent on a discounted fee-for-service basis, typically in return for expedited payment of claims and an increased volume of patients.

Stop Loss Provider is an Insurance Company or Reinsurer offering employer financial protection against catastrophic claims.

Getting started on setting up a self-insured group health plan.

If upon reading the information on this web site you think self-insurance may be a good option for your organization, it is suggested that you contact a third party administrator (TPA) and/or consultant to get the evaluation process started. A directory of these entities and other self-insurance industry service providers can be accessed by clicking here. Just like with starting any new business relationship, it is recommended that you speak to multiple companies to determine who is the best fit for you.

Employee communication strategies to maximize the success of self-insured group health plans.

Coming Soon

Glossary of Terms

Summary Plan Description (SPD)

Mandated Benefits

Plan Year


ASO (Administrative Services Only)

Benefit Booklet

Employee Retirement Income Security Act of 1974 (ERISA)


Plan Document

Plan Participant

Plan Sponsor

Third Party Administrator (TPA)

PPO or Managed Care Network

Medical Management

Aggregate Stop-Loss

Attachment Point

Contract Period



Binder Premium

Specific Stop-Loss

Specific Deductible

Expected Paid Claims



Incurred Claims


Paid Claims


Specific Stop-Loss

Stop-Loss Carrier

Claim Cost Negotiation

Disclosure Statement



Shock Loss