When a small business owner considers group coverage for employees, their search starts with the Big Question: How do I pay for my employees’ health insurance?
The Big Answer is a bit complicated, but we’ll cover the bases in this post.
To pay for employees’ health insurance, you can structure group coverage in one of two ways: through a (1) fully-funded or a (2) partially self-funded health insurance model.
Option 1: Fully-Funded Health Insurance
“Fully-insured” or “fully-funded” health insurance is another term for traditional employer-sponsored coverage. It means your group plan is completely insured by your insurance carrier.
Here are the distinguishing points of a fully-funded plan:
- Your business pays a fixed monthly premium to the insurance carrier you choose.
- Your premium rate is determined by the number of employees enrolled in your plan each month. (If the number of enrollees changes for the month, your monthly premium will change.)
- The insurance carrier pays for enrollees’ healthcare based on the health benefits outlined in your group policy.
- As with an individual health insurance plan, enrollees (i.e. your employees and their dependents) must pay out-of-pocket costs, like deductibles and copays, that are associated with the policy’s covered services.
The Benefits Of A Fully-Funded Plan
You anticipate your business’ yearly healthcare expenses.
Because you pay a fixed premium, you know what you’ll spend for annual group coverage.
Your insurance carrier takes on the risk of medical expenses.
As a result, you get full protection for medical claims that are covered by your insurance policy.
The Drawback Of A Fully-Funded Plan
Your business won’t get a refund for unused health benefits.
Regardless of a company’s size, only about one-third of employees actually use their health insurance benefits. With a fully-insured product, you pay the same fixed fee, no matter how few claims your employees make.
Option 2: Partially Self-Funded Health Insurance
The partial self-funded model is what its name implies: your insurance plan is paid partly by you and partly by your insurance carrier.
Here’s how partial self-funding (also called “partial self-insuring”) works:
You charge employees for their healthcare coverage. A portion of these funds go to your insurance carrier, and the rest go to a reserve account for your business. In return, the insurance carrier pays for major medical expenses, like ER visits and surgeries; and your business uses its reserve funds to pay for cheaper medical costs, like doctor visits and prescription drugs.
The Benefits Of A Partially-Funded Plan
You have more flexibility.
Based on a projection of your healthcare costs, you decide how much to set aside for your reserve account.
You only pay for what employees use.
Unlike the fully-funded model, you only pay for incurred medical claims.
You save money.
The partial self-funded model leaves the risk of costly expenses to the insurance carrier. Meanwhile, you avoid extra fees that come with a fully-funded insurance structure.
You provide a low-cost plan that’s rich in benefits.
Under the partial self-funded model, the employer can offer platinum-level insurance for bronze-level prices. Comprehensive coverage at an affordable price — that’s a win for you and your employees!
You encourage employee health and well-being.
This model also provides incentive for your small business to offer a wellness program in conjunction with its group healthcare coverage. After all, the healthier your employees are, the fewer medical claims they’ll have to make.
The Drawback Of A Partially-Funded Plan
You take on partial risk for medical expenses.
With partial self-insuring, employers take on a small risk by covering costs up to a certain amount. The insurance carrier takes on the risk of covering much larger expenses.
“It’s all about risk tolerance,” says Chris Reiter, vice pesident of employee benefits for Woodruff Sawyer & Company in Novato, CA. “In taking on a little more risk, you (the employer) can potentially save a lot.”
Can’t Decide Which Option To Choose?
Talk to an agent!
We know it’s confusing to pick apart the differences between group health insurance models. That’s why we’re here to help! Get in touch with a licensed health insurance agent at Regency West Insurance Services. Our friendly insurance professionals will help you set up a customized benefits package that meets you and your employee’s needs.
Visit us at RegencyWestInsurance.com or call us at (858) 699-0268. We’re ready to answer your questions and get your business covered!