Disadvantages of self-funding
Risk assumption
The employer pays all claims in a self-funded plan, resulting in a risk that claims could exceed estimates, or even exceed the employer’s ability to pay. Employers can mitigate this risk with the purchase of stop-loss insurance, which reimburses them for claims that exceed the stated policy amount. A managing general underwriter (MGU) specializing in health benefits can evaluate the risks and amount of coverage needed to develop a stop-loss policy and provide appropriate financial security. However, smaller employers may find the cost of stop-loss insurance prohibitive.
Increased employer involvement and responsibility
With self-insured plans, the employer must provide services that the insurance carrier provides under a fully-insured plan, such as claims administration, appeals, and fulfillment of compliance requirements. Although most companies hire a TPA to handle these tasks for them, the company must still assume fiduciary responsibility for the health of the plan.
Asset exposure
Depending on how the plan is established and funded, the assets of a company with a self-funded plan may be exposed to liability in the event of legal action against the plan.
