A brief summary of self-funded plans.
What is a self-insured Workers’ Compensation program?
A self-insured Workers’ Compensation plan (or a self-funded plan as it is also called) is one in which the employer assumes the financial risk for providing Workers’ Compensation benefits to its employees. In practical terms, self-insured employers pay the cost of each claim ‘out of pocket’ as they are incurred instead of paying a fixed premium to an insurance carrier or to a state-sponsored Workers’ Compensation fund.
Why do employers self-insure their Workers’ Compensation programs?
Employers typically choose to self-insure their Workers’ Compensation plans because it gives them more opportunities to control costs and ensure their injured workers are receiving timely and proper care. Under a self-insured arrangement, employers also pay claims as they are incurred, as opposed to paying costs up front in the form of commercial insurance or a state fund policy. This ‘pay as you go’ approach serves to maximize cash flow.
Is self-insurance the best option for every employer?
No. Since a self-insured employer assumes the risk for paying the Workers’ Compensation claim costs for its employees, it must have the financial resources (cash flow) to meet this obligation, which can be unpredictable. Therefore, small employers and other employers with poor cash flow may find that self-insurance is not a viable option. It should be noted, however, that there are many smaller companies that maintain viable self-insured Workers’ Compensation programs.
Can self-insured employers protect themselves against unpredicted or catastrophic claims?
Yes. While the largest employers have sufficient financial reserves to cover virtually any amount of Workers’ Compensation claim costs, most self-insured employers purchase what is known as excess insurance to reimburse them for claims above a specified dollar level.
Who administers claims for self-insured Workers’ Compensation programs?
Self-insured employers can either administer the claims in-house, or subcontract this service to a third party administrator (TPA). TPAs can also help employers set up their self-insured Workers’ Compensation plans and coordinate excess insurance coverage, provider network contracts and utilization review services.