Beware of the Risks in Self-Funded Health Plans

Many employers offer health coverage to employees and their dependents by purchasing an insured health plan or setting up a self-funded health plan. The Division of Insurance cautions all employers, but especially small employers, to understand the difference between insured and self-funded health plans.

Insured health plans versus self-funded health plans

In an insured health plan, an employer pays a premium in return for a licensed insurance carrier agreeing to pay the cost of all health services covered by the health plan. Insured health plans are subject to all state insurance laws and may be sold by only licensed insurance producers (agents or brokers) or persons employed by the insurance carrier.

In a self-funded health plan, an employer funds the cost of all health services covered by the health plan. Although many employers hire an administrator to handle claims payments, the employer is responsible for funding these payments. Self-funded plans, generally, are not subject to state insurance laws, but are subject to several federal laws and may be set up by any administrator hired by employers.

Risks of self-funded health plans

Employers who set up self-funded health plans are responsible for payment of all covered health claims, whether routine or catastrophic. Employers may buy so-called "stop loss" insurance to help cover high-cost claims, but employers are responsible for payment of all claims until they reach the "stop loss" level. The Division of Insurance strongly advises that small employers (those with fewer than 100 employees) take extreme caution when considering self-funded health plans and urges such employers to consider the financial consequences of a year with higher than projected health claims.

Employers must be aware of federal non-discrimination rules applying to employer-sponsored health plans. Health factors - including current or future health conditions - may not be used to deny access to the employer-offered health coverage, discontinue existing coverage, or charge different rates for such coverage. Employers who violate these rules may be subject to Department of Labor action.

  • Understand the type of plan you are buying
    If you want to buy an insured health plan, verify that is what you are buying.
  • Read the fine print before choosing a health plan
    Make sure you understand the plan benefits and exclusions. Employers choosing to set up self-funded plans should understand their exposure to potential high cost health care claims. Make sure you know the employer's responsibilities for funding the claims while the self-funded health plan is active, for funding claims if the plan is discontinued and for understanding the way that stop-loss coverage works.
  • Know your obligations under federal and state laws
    Understand the rules regarding the non-discriminatory offer of health benefits, regardless of an individual's health status.
  • Beware of any advice to "carve out" any employees/dependents with health conditions
    Federal law prohibits excluding persons from coverage, charging them a higher premium or putting them in a different health plan because of any health condition.

Choices you make could be extremely costly or not meet your employees' needs. If you have questions or complaints about advice received about setting up a health plan, please contact the Massachusetts Division of Insurance at (617) 521-7794.