Some organizations take a more hands-on approach to employee benefits by funding their own insurance programs. This approach can provide comprehensive health insurance to employees.
By doing so, these organizations can tailor their insurance plans to meet the specific needs of their employees and their families. This can lead to better health outcomes and increased job satisfaction.
In these self-funded programs, employers are responsible for managing the risk and paying out claims directly. This can be a cost-effective option for employers who have a large and stable workforce.
What is Self-Insurance?
Self-insurance is a financial arrangement where an organization takes on the responsibility of paying for its own insurance claims. This can be done by setting aside a portion of its revenue each year to cover potential losses.
By self-insuring, organizations can avoid paying insurance premiums to a third-party provider. In fact, a large company with a strong financial position can create a self-insurance fund by setting aside a portion of its annual revenue, such as 5% of its annual revenue.
Self-insurance can be a cost-effective option for organizations that have a low risk profile and can afford to absorb potential losses.
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Benefits and Advantages
Organizations that fund their own insurance programs offer their employees a range of benefits and advantages.
Among firms offering health benefits, 95% offer them to dependents of their workers. This is a significant advantage for employees who have family members to support.
Firm size plays a significant role in determining the offer rate of health benefits, with virtually all firms with at least 200 employees offering health benefits. This is in stark contrast to small firms with fewer than 25 employees, which employ just 16% of workers.
Benefits Scope
Employers offer different types of health benefit options to employees, including comprehensive benefit plans, service-specific benefits, and supplemental benefit plans.
Comprehensive benefit plans cover a large share of the cost of hospital, physician, and prescription costs that a family might incur during a year.
Only 39% of firms with three to nine workers offered health benefits, while virtually all (98%) firms with at least 200 employees did so.
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A large majority of firms are small, with 83% of firms with three or more employees having fewer than 25 employees.
Among firms offering health benefits, 13% of firms with fewer than 200 workers and 26% of larger firms offered health benefits to part-time workers in 2023.
The primary advantage of a group plan is that it spreads risk across a pool of insured individuals, keeping premiums low for group members.
Insurers can exert even greater control over costs through health maintenance organizations (HMOs), in which providers contract with insurers to provide care to members.
Just over half (53%) of firms with three or more workers offered health benefits to at least some of their workers in 2023.
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Tax Advantages
Tax Advantages can be a huge relief for many individuals and businesses.
Deducting business expenses is a common tax advantage, allowing you to reduce your taxable income.
According to our research, businesses can deduct up to 100% of meals and entertainment expenses for clients.
This can lead to significant tax savings, especially for small businesses and entrepreneurs.
Retirement savings plans, such as 401(k) and IRA, also offer tax advantages, allowing you to contribute pre-tax dollars.
In fact, contributions to these plans may be tax-deductible, reducing your taxable income.
Businesses can also take advantage of tax credits, such as the Research and Development (R&D) tax credit, which can provide a direct reduction in tax liability.
This credit can be especially beneficial for startups and small businesses investing in research and development.
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Benefits for Nonprofits
Nonprofit organizations have limited options for offering health benefits to their staff, and small group health insurance is often too expensive and complex.
Traditional group health insurance can be a significant financial burden, which is why many nonprofits explore alternative options.
Health reimbursement arrangements (HRAs) are a popular alternative to traditional group health insurance, allowing nonprofits to offer health benefits to their staff.
HRAs can be tailored to meet the specific needs of a nonprofit organization, providing a more flexible and cost-effective solution.
Employee stipends are another option that nonprofits can consider, offering staff a fixed amount of money to use towards their health expenses.
This approach gives staff more control over their health benefits and can be a more affordable option for nonprofits.
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Types of Self-Insurance
Self-insurance can be an attractive option for organizations, as it allows them to pool their resources and manage risk more effectively. This approach is similar to a group health insurance plan, where the risk is spread across a pool of insured individuals.
By self-insuring, organizations can keep costs low by exerting control over healthcare costs through health maintenance organizations (HMOs), which contract with providers to offer care to employees. HMOs tend to keep costs low, but may restrict the flexibility of care.
Preferred provider organizations (PPOs) offer employees more flexibility in choosing doctors and specialists, but may charge higher premiums than HMOs.
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Types of Self-Insurance
High-deductible health plans with a savings option (HDHP-SO) are a relatively new plan type that pairs a high deductible with either a Health Reimbursement Arrangement (HRA) or Health Savings Account (HSA). HDHP-SO plans now represent almost 3 in 10 covered workers.
On average, HSA-qualified health plans have higher deductibles than other plan types and lower premiums. Employers can contribute to the enrollee's HSA account, reducing the higher cost sharing in these plans. Sixty-two percent of employers offering single coverage and 59% of employers offering family coverage contribute to the enrollee’s account.
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Employer contributions to HSA-qualified HDHPs can be substantial, with an average contribution of $657 for single-coverage HSA-qualified HDHPs and $1,203 for family-coverage HSA-qualified HDHPs. Some employers may make their account contribution contingent on other factors, such as completing wellness programs.
Integrated HRAs, also known as group coverage HRAs (GCHRAs), are employer-funded medical reimbursement plans linked with a group health insurance plan. These plans are only offered to those who participate in an organization’s group plan and are intended to help employees with their deductible costs.
Employees can use their GCHRA allowance to get reimbursed for healthcare costs before their out-of-pocket maximum is met or for expenses that aren’t fully covered by the group plan, such as vision or dental expenses.
Health stipends, also known as taxable health stipends, are a type of self-insurance that work like an HRA, where you can provide a monthly allowance for medical expenses. However, they are taxable for both the employer and the employee, and come with fewer regulations than an HRA.
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Individual Coverage HRA
An Individual Coverage HRA (ICHRA) is a type of self-insurance plan that allows employers to reimburse employees tax-free for individual health insurance premiums and other medical expenses. This plan is available to organizations with at least one W-2 employee.
ICHRA is similar to a QSEHRA, but it can be offered by organizations with 50 or more full-time employees. This makes it a more flexible option for larger businesses.
An ICHRA can be offered as a stand-alone benefit or as another benefits option for employees who don't qualify for the group health insurance policy. However, group health insurance and an ICHRA can't be offered together to the same group of employees.
ICHRA adoption among U.S. employers tripled from 2020 to 2022, according to the HRA Council. This suggests that more employers are turning to ICHRAs as an alternative to group health insurance.
A survey conducted by the Kaiser Family Foundation found that 88% of large employers favored ICHRAs as an alternative to group health insurance. This highlights the growing popularity of ICHRAs among larger businesses.
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Administration and Costs
Organizations that fund their own insurance programs offer their employees a convenient and cost-effective way to access healthcare benefits. This is particularly beneficial for nonprofit directors who often wear multiple hats, leaving them with little extra time to spend researching and administering employee benefits.
One of the key advantages of self-funded insurance programs is their ease of administration. With automated software solutions like PeopleKeep, setting up and administering an HRA (Health Reimbursement Arrangement) can be done in just a few minutes every month.
The cost of group health insurance can be a significant burden for organizations. According to the Kaiser Family Foundation, the average group health insurance policy costs around $8,435 annually for an individual, with the employee paying 17% of the premium.
Here's a breakdown of the average annual costs for group health insurance:
In contrast, self-funded insurance programs can be more cost-effective, especially for organizations with a large number of employees. By pooling their risk, employers can reduce the uncertainty in setting premiums and lower the costs for their employees.
Quick and Easy Administration
Administering employee benefits doesn't have to be a daunting task. ESI (Employer-Sponsored Insurance) plans are relatively easy to administer because they add many employees to a risk pool through a single transaction, with no need to examine their health in most cases.
Employers also provide and collect enrollment information to workers and collect the employee share of premiums, dramatically reducing the number of transactions and reducing the amount of unpaid premiums that typically occur when individuals purchase insurance directly from insurers.
High Deductible Health Plans with a Savings Option (HDHP-SO) are another type of plan that can be easy to administer, especially if you utilize an automated software solution. These plans pair a high deductible with either a Health Reimbursement Arrangement (HRA) or Health Savings Account (HSA), making it simpler to manage employee benefits.
HRAs are quick and easy to set up and administer monthly, especially if you utilize an automated software solution like PeopleKeep. With their software services to help you make reimbursements and award-winning customer support team to answer your questions, you'll only need a few minutes every month to administer your own HRA.
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Network Strategies Used by Plans
Employer-sponsored health insurance plans often use provider networks to offer lower out-of-pocket expenses to enrollees. These networks can be broad or narrow, with some plans limiting the number of providers to reduce costs.
In 2023, 9% of firms offering health benefits reported offering at least one narrow network plan to their employees. This type of plan restricts the number of providers that can participate, making it more restrictive than standard HMO networks.
Employers use tiered or high-performance networks, where providers are grouped based on quality, cost, and efficiency of care. This approach encourages enrollees to choose lower-cost providers.
Centers of Excellence are facilities or providers that health plans and employers single out for delivering exceptionally high-value specialty care. Enrollees may be required or encouraged to use these designated providers for certain types of care.
Firms often view employers as having significant leverage in health care markets based on their network design, but this leverage is dampened by factors such as concentrated provider markets and employees' preferences for broad network plans.
Only 67% of firms believed there were enough mental health providers in their largest plan's network to provide timely access to services, highlighting a specific concern with network availability.
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What is an HRA?
An HRA is an IRS-approved, employer-funded health benefit used to reimburse employees for qualifying out-of-pocket medical care expenses and individual health insurance premiums.
Many organizations use HRAs over group health insurance or health stipends because of the tax advantages and budget control they facilitate.
With an HRA, organizations set a monthly allowance for employees to use.
After making eligible healthcare purchases, including insurance premiums, employees submit documentation of their medical expenses to their employer.
You'll review the documents and reimburse employees up to their monthly allowance amount, tax-free, if everything's in order.
There are different types of HRAs, each with its own features and requirements.
Cost Estimation
Group health insurance costs can be a significant burden for both employers and employees. The average annual cost for an individual is roughly $8,435, with the employee paying 17% of the premium.
For family coverage, the average cost is significantly higher, at $23,968 annually, with the employee paying 29% of the premium. This highlights the importance of understanding the costs involved in group health insurance.
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To give you a better idea of the costs, here is a breakdown of the average annual costs for group health insurance:
Keep in mind that these costs are averages and can vary depending on several factors, including the employer's size and industry, as well as the level of coverage chosen.
History and Dominance
The history of group health insurance dates back to 1798, when Congress established the U.S. Marine Hospital for Navy seamen, requiring participation and deductions from salaries.
Employer-sponsored group health insurance grew rapidly in the 1940s as a way for employers to get around wage controls set during World War II, resulting in a tripling of health insurance coverage by the end of the war.
Montgomery Ward is credited with establishing the nation's first group health insurance policy in 1910, providing cash payments to workers equal to half their wages in the event of injury or illness.
The employer-sponsored model is dominant in the US, making up the most common source of private health insurance, thanks to its efficiency and cost benefits.
Why Is It So Dominant?
Employer-sponsored health insurance (ESI) is the most common source of private health insurance, and for good reason. It's efficient, with advantages in risk management and administration costs.
Providing health insurance through the workplace is a cost-effective approach. Contributions towards premiums by employers and employees are also tax-free, which is a significant federal and state subsidy.
This tax-free benefit makes ESI a more attractive option for both employers and employees. It's a win-win situation that has contributed to the dominance of ESI in the private health insurance market.
As a result, people with higher needs for coverage, such as those in poorer health, are more likely to purchase and pay higher prices. This phenomenon is called adverse selection.
Insurers must address these tendencies to avoid having their risk pools dominated by a small share of people with high needs, leading to increased premiums.
History of
The concept of group health insurance dates back to 1798, when Congress established the U.S. Marine Hospital for Navy seamen.
Participation was compulsory, with deductions coming from salaries. This early example set the stage for employer-sponsored health insurance to come.
The nation's first group health insurance policy was established by Montgomery Ward in 1910, but it didn't reimburse workers for medical expenses.
Instead, it provided cash payments to workers equal to half their wages in the event of injury or illness. This innovative approach showed that employers were willing to take on a role in providing health coverage.
The progressive movement of the early 1900s led to several proposals for compulsory national health insurance, but they failed due to opposition from various groups.
Employer-sponsored group health insurance grew rapidly in the 1940s as a way for employers to get around wage controls set during World War II.
By 1943, the War Labor Board introduced wage caps, but insurance premiums were excluded, allowing employers to offer health insurance to attract and retain workers.
As a result, health insurance coverage tripled by the end of the war. This marked a significant shift towards employer-sponsored health insurance.
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Employer and Worker Details
Employers with at least one W-2 employee can offer an Individual Coverage HRA (ICHRA). This includes businesses, nonprofits, government entities, and religious organizations.
Employers offering HSA-qualified health plans contribute to the enrollee's account, with 62% of single-coverage employers and 59% of family-coverage employers making contributions. On average, employers contribute $657 to single-coverage HSA-qualified HDHPs, and $1,203 to family-coverage HSA-qualified HDHPs.
Some employers may make their account contribution contingent on other factors, such as completing wellness programs.
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[Worker Access Count]
About 80.8% of adult non-elderly workers worked for an employer that offered Employer-Sponsored Insurance (ESI) to at least some employees as of March 2023.
Most workers who had access to ESI were eligible to enroll in the coverage offered at their job, with 93.1% of these workers being eligible.
The share of workers working for employers offering ESI and being eligible for coverage varies significantly by income. Workers with incomes at least 400% of the Federal Poverty Level (FPL) were more likely to have access to ESI, with 88.2% working for an employer offering ESI and 84.6% being eligible for coverage.
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In contrast, workers with incomes under 200% of the FPL had lower rates of access to ESI, with 60.6% working for an employer offering ESI and 49.5% being eligible for coverage.
Full-time workers were much more likely to be working for an employer offering ESI and to qualify for coverage at their job.
About 74.4% of non-elderly adult workers eligible for ESI at their jobs in March 2023 were ESI policyholders.
Employer Benefits Offered
About four in five adult non-elderly workers worked for an employer that offered employer-sponsored insurance (ESI) to at least some employees as of March 2023.
The share of workers working for an employer offering ESI varied significantly by income, ranging from 60.6% for workers with incomes under 200% of the federal poverty level (FPL) to 88.2% for workers with incomes at least 400% of the FPL.
Among firms with three or more workers, just over half (53%) offered health benefits to at least some of their workers in 2023. However, firm offer rates differed significantly with firm size, with only 39% of firms with three to nine workers offering health benefits.
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Firms with 200 or more employees had an employer offer rate of almost 100%, employing 64% of workers. Ninety-five percent of firms offering health benefits offered them to dependents of their workers.
Virtually all plans have preferential cost sharing for enrollees to visit providers participating in a preferred provider network. Some plans require enrollees to visit a primary care physician or other gatekeeper before they are referred to a specialist.
Employers can offer different types of health benefit options to employees, including comprehensive benefit plans, service-specific benefits, and supplemental benefit plans. Comprehensive benefit plans cover a large share of the cost of hospital, physician, and prescription costs.
High-deductible health plans with a savings option (HDHP-SO) pair a high deductible with either a Health Reimbursement Arrangement (HRA) or Health Savings Account (HSA). HDHP-SO plans may be an HMO, PPO, or POS, meeting specified federal guidelines.
HRAs empower nonprofit owners to offer quality health benefits on a tight budget, allowing them to set a specific budget that they can count on month-to-month and year-to-year. By offering quality benefits, nonprofit owners can attract and retain employees despite a tight budget.
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A group coverage HRA (GCHRA), also known as an integrated HRA, is an employer-funded medical reimbursement plan linked with a group health insurance plan. GCHRAs are only offered to those who participate in an organization's group plan, as it's an ancillary benefit intended to help employees with their deductible costs.
The primary advantage of a group plan is that it spreads risk across a pool of insured individuals, keeping premiums low for group members. Insurers can exert even greater control over costs through health maintenance organizations (HMOs), in which providers contract with insurers to provide care to members.
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Premiums and Contributions
Employer health insurance premiums are a significant share of an employee's overall compensation, at 6.9% for private industry as of June 2023.
The average total premiums for covered workers in 2023 were $8,435 for single coverage and $23,968 for family coverage, for a family of four.
Employer contributions to an employee's health insurance premium can be substantial, with some firms offering generous benefits to attract new employees.
In 2023, 10% of covered workers worked at a firm with an average annual premium of at least $31,500 for family coverage.
The average family premium for covered workers at firms with a relatively large share of lower-wage workers is lower than at firms with fewer lower-wage workers.
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Frequently Asked Questions
What is an organization that transacts insurance only with its own members?
A captive insurer is an organization that provides insurance exclusively to its own members, allowing them to benefit from underwriting profits. This unique setup enables members to manage and share risks more effectively.
What are the cons of a self-funded health insurance plan?
Self-funded health insurance plans come with higher compliance requirements and varying monthly cash flow due to unpredictable claims, which can be a challenge for employers. Additionally, a long-term perspective is necessary to analyze plan performance, requiring a 3-5 year commitment.
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