Disadvantages of Self Funding

Self funding health insurance is not appropriate for every employer. Stability, low turnover, and a favorable claims experience under a fully insured plan are important in any event, but more so with a smaller employer.

To be effective in realizing the advantages of self funding, the employer must be disciplined about eligibility of benefits, actual claim payments, and expenses. Self funding may not reduce costs every year — or at all. In addition, the employer must be willing to deal with these potential disadvantages:

• Risk assumption — The employer assumes the risk between the normally anticipated claim level and the stop loss coverage level.
• Provision of services — The employer must provide the services of the the insurance carrier normally provides (claims, follow up, etc.) This is best accomplished by contracting with a competent third party administrator (TPA).
• Asset exposure — The employers assets are exposed to any liability created by legal action against the self-funded plan.
• While specific and aggregate stop loss protection limits the maximum employer liability, there is some risk that is not transferable to the stop loss carrier.
• The employer must be willing to trade the complete security of a fully insured plan for the possibility that actual cost may exceed what the fully insured plans would have cost.
• The employer becomes the plan fiduciary under ERISA, and is ultimately responsible for any compliance issues.