The Skinny on Fully- and Self-Insured Agreements
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A simple definition of insurance is an agreement between the insurer and the insured which specifies how claims will be paid for. Who ultimately pays those claims? It depends on if the policy is self-insured or fully-insured. Don’t worry – we have the answers here for you!
In a fully-insured arrangement, our client (XYZ Corp) secures the services of an insurer (Aetna, UPMC, Highmark, and UnitedHealthcare, just to name a few) and pays a predetermined monthly premium in exchange for paying all of the claims for their employees (the insured). The insurance company processes the claims and remits payment to the providers (in this case the doctor, the physical therapy company or chiropractor for example). This is a simple arrangement for XYZ Corp. who is sponsoring the insurance plan. In a fully-insured arrangement, the insurance company bears all of the risk. If the claims are higher than the amount of premium collected, the insurance company takes a loss. If the claims are lower than the amount of premium collected, the insurance company retains the profits.
In a self-insured arrangement, a company still secures the services of an insurance company; however, the services which are being secured are for administrative services only (ASO). In exchange for a “per contract per month” fee (PCPM), the insurance company processes the claims and remits payment to the providers. While this may sound similar to a fully-insured plan, the previously mentioned PCPM fee is substantially lower than a fully-insured premium (i.e. $30-$75 per month). Once the claims have been paid, the insurance company bills XYZ Corp. for the total amount of their claims. In this arrangement, XYZ Corp. sets their own rates based on the administrative fees, projected claims, and other expenses which are a part of the plan, and XYZ Corp. bears all of the risk. If claims are lower than anticipated, XYZ Corp. retains the collected money for future expenses and can start to build up a reserve.
The collected money pays plan costs such as stop-loss insurance, which protects self-insured companies from catastrophic losses, monthly administrative fees, and expected claims.
Transitioning to a self-insured arrangement can save a company money on their medical plans, but not without some risk. With this risk, there are also solutions such as stop-loss insurance (protection from catastrophic losses), disease management, and wellness solutions which can lower claims. After all – the lower the claims, the less you pay.