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Insurance Glossary

Glossary: Self-funded Plans

Under the terms of a self-funded healthcare plan, an employer puts aside funds to pay anticipated health insurance claims for their employees, instead of paying a premium to a health insurance carrier.

In this respect, the employer is the insurer, and carries the associated risk. To help reduce this risk, the employer purchases "reinsurance," at a premium far less expensive the full coverage. (For example, the employer's reinsurance policy covers claims in excess of $50,000, so in effect the employer has a $50,000.00 deductible for all employees and each of their covered dependents, and reinsurance will pay all claims from $50,000.)

Employers find self funded plans very attractive because of the extremely small premiums. However, in a bad year it's possible to pay out amounts far in excess of anticipated funds. Statistically, the larger group, the better the anticipated costs, and therefore the more stable a self funded plan will operate. Employers electing this option will use a TPA (third party administrator) to process all claims and paperwork.

Most employers lease a PPO network for their employees, depending on benefit structure. This often saves out-of-pocket money for the employee, and reduces risk to the employer by allowing them to take advantage of established PPO contracts with doctors and hospitals.