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Self-Insured Health Insurance Coverage
Bernadette Fernandez
Analyst in Health Care Financing
May 12, 2010
Congressional Research Service
7-5700
www.crs.gov
R41069
CRS Report for Congress
P
repared for Members and Committees of Congress
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Self-Insured Health Insurance Coverage
Summary
Private health insurance can be provided to groups of people that are drawn together by an
employer or other organization. Such groups are generally formed for some purpose other than
obtaining insurance, like employment. When insurance is provided to a group, it is referred to as
“group coverage” or “group insurance.” A common distinction made between private health
coverage offered to groups is how such coverage is funded. That is, the plan sponsor may either
purchase group health insurance from a state-licensed insurance carrier, or fund the health
benefits directly. The former refers to fully insured plans; the latter, self-insured plans.
Self-insurance refers to coverage that is provided by the organization seeking coverage for its
members. Such organizations set aside funds and pay for health benefits directly. (Enrollees may
still be charged a premium.) Under self-insurance, the organization itself bears the risk for
covering medical expenses. Because self-insured plans are not purchased from an insurance
carrier licensed by the state, they are exempt from state requirements and subject only to federal
regulation. With fully insured plans, the insurance carrier charges the plan sponsor a fee for
providing coverage for the benefits specified in the insurance contract. The fee typically is in the
form of a monthly premium. (In turn, the sponsor may decide that each person or family who
wishes to enroll must pay part of the premium cost.) Under the fully insured scenario, the private
insurer bears the insurance risk; that is, the insurer is responsible for covering the applicable costs
associated with covered benefits. Insurance purchased from a state-licensed insurer is subject to
both federal and state regulation.
A majority of individuals with private health insurance coverage are enrolled in self-insured
plans. In 2008, 55% of private-sector enrollees were in such plans. This proportion differs when
comparing small firms and large firms. In 2008, of the private-sector workers who were
employed at small firms with health coverage, 12% were enrolled in self-insured health plans. In
contrast, of private-sector workers employed at large firms, 65% were enrolled in self-insured
plans. Consistent with these findings is the share of private-sector firms that offer at least one
self-insured plan. In 2008, while 34% of all private-sector firms that offered insurance had at least
one self-insured plan, only 13% of small firms had such a plan, compared with 63% of large
firms.
To assist individuals, families, and employers in obtaining health coverage, the 111th Congress
passed major health reform legislation. The Patient Protection and Affordable Care Act (P.L. 111-
148, PPACA) was signed into law on March 23, 2010, and later amended by the Health Care and
Education Reconciliation Act of 2010 (P.L. 111-152). PPACA imposes new requirements on
individuals, employers, and health plans; restructures the private health insurance market; sets
minimum standards for health coverage; and provides financial assistance to certain individuals
and, in some cases, small employers. Among the provisions in PPACA are ones that would have a
major impact on private health insurance coverage, including self-insured plans.
This report will be updated periodically.
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Self-Insured Health Insurance Coverage
Contents
Introduction ................................................................................................................................ 1
Background ................................................................................................................................ 1
Self-Insured vs. Fully Insured Health Plans ........................................................................... 1
Regulation of Health Plans .................................................................................................... 2
Data Related to Self-Insured Plans ........................................................................................ 4
Health Reform ............................................................................................................................ 4
Health Reform Definitions Relevant to Self-Insured Plans..................................................... 5
Private Health Insurance Reforms ......................................................................................... 5
Health Insurance Exchange ................................................................................................... 7
Employer Requirements ........................................................................................................ 7
Taxes on Health Insurance Plans ........................................................................................... 7
Tables
Table 1. Private Health Insurance Reforms Applicable to Self-Insured Plans................................ 6
Contacts
Author Contact Information ........................................................................................................ 8
Acknowledgments ...................................................................................................................... 8
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Self-Insured Health Insurance Coverage
Introduction
Most Americans with health insurance coverage obtain such coverage through the private sector.
Moreover, most private coverage is provided through an employer to workers and dependents of
workers. Such employment-based coverage may either be purchased from an insurance carrier
(fully insured health plan), or funded directly by the employer (self-insured health benefits). The
distinction between self-insured and fully insured plans is significant with respect to applicable
law and regulation, which, in turn, affects an enrollee’s access to certain health services,
applicability of consumer protections, and ability to receive financial compensation in a court of
law, among many other issues. To assist individuals, families, and employers in obtaining health
coverage, the 111th Congress passed major health reform legislation, which contains provisions
that directly affect self-insured plans.1
This report provides background information on private health insurance coverage, state and
federal regulation of private coverage, and self-insured health plans.2 It includes data on the
prevalence of self-insurance and discusses the employer decision to self-insure. Lastly, it
describes selected private health insurance provisions under federal health reform, and application
of such provisions on self-insured plans.
Background
People buy insurance to protect themselves against the possibility of financial loss in the future.
Such losses may be due to a motor vehicle collision, natural disaster, or other circumstance. For
health care consumers, financial losses may result from the use of health care services. Health
insurance then provides some protection against the possibility of substantial financial loss due to
high health care expenses.
Private health insurance can be provided to groups of people that are drawn together by an
employer or other organization, such as a trade union. Such groups are generally formed for some
purpose other than obtaining insurance, like employment. When insurance is provided to a group,
it is referred to as “group coverage” or “group insurance.” In the group market, the entity that
purchases health insurance on behalf of a group is referred to as the plan “sponsor.” Consumers
who are not associated with a group may be able to obtain private health coverage by purchasing
it directly from an insurer in the individual (or nongroup) insurance market.3
Self-Insured vs. Fully Insured Health Plans
A common distinction made between private health coverage offered to groups is how such
coverage is funded. That is, the plan sponsor may either purchase group health insurance from a
1 For additional information about the private insurance provisions under federal health reform, see CRS Report
R40942, Private Health Insurance Provisions in the Patient Protection and Affordable Care Act (PPACA), by Hinda
Chaikind et al. (Hereinafter cited as Private PPACA.)
2 For additional background information about health insurance in general, see CRS Report RL32237, Health
Insurance: A Primer, by Bernadette Fernandez.
3 For additional information about the private health insurance market, see CRS Report R40834, The Market Structure
of the Health Insurance Industry, by D. Andrew Austin and Thomas L. Hungerford.
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state-licensed insurance carrier, or fund the health benefits directly. The former refers to fully
insured plans; the latter, self-insured plans.
Organizations that self-insure (or self-fund) do not purchase health insurance from an insurance
carrier. Self-insurance refers to coverage that is provided by the organization seeking coverage for
its members (e.g., an employer offering health benefits to his employees). Such organizations set
aside funds and pay for health benefits directly. (Enrollees may still be charged a premium.)
Under self-insurance, the organization itself bears the risk for covering medical expenses. Firms
that self-fund health benefits typically contract with third-party administrators (TPAs) to handle
administrative duties such as enrollment, premium collection, customer service, and utilization
review. Because self-insured plans are not purchased from a carrier licensed by the state, they are
exempt from state requirements and subject only to federal statutes and regulation. This
exemption from state law allows employers who self-fund health benefits to offer the same health
plans in multiple states.
With fully insured plans, the insurance carrier charges the plan sponsor a fee for providing
coverage for the benefits specified in the insurance contract. The fee typically is in the form of a
monthly premium. (In turn, the sponsor may decide that each person or family who wishes to
enroll must pay part of the premium cost.) Under the fully insured scenario, the private insurer
bears the insurance risk; that is, the insurer is responsible for covering the applicable costs
associated with covered benefits. From a commercial insurer’s perspective, the total amount of
premiums collected ideally will cover the costs of any insurance claims generated by the enrollees
plus administrative and other plan costs, and still leave funds leftover for profit. Insurance
purchased from a state-licensed insurer is subject to both federal and state rules.
Regulation of Health Plans
The regulation of insurance traditionally has been a state responsibility, and tremendous variety
exists in health insurance regulation among the states.4 Individual states have established
standards applicable to the business of insurance; requirements imposed on insurance carriers
range from rating rules and consumer protections to licensing requirements, solvency standards,
and premium taxation. For example, all states require state-licensed carriers to offer coverage for
specified health care services; these requirements are known as benefit mandates. Some states
have many benefit mandates; other states have relatively few. Even if multiple states have
mandates concerning the same type of benefit (e.g., mental health services), such mandates may
still vary in scope or specificity. Because fully insured plans are subject to state law, those plans
must offer benefits that are mandated. On the other hand, self-insured plans are not subject to
state insurance rules so they are exempt from such mandates.
4 Insurance matters are primarily regulated at the state, rather than the federal, level. Congress explicitly recognized the
role of the states in the regulation of insurance with the passage of the McCarran-Ferguson Act of 1945. This law was
passed in response to the Supreme Court’s ruling in United States v. South-Eastern Underwriters, 322 U.S. 533 (1944),
in which the Court affirmed the federal government’s right to regulate the competitive practices of insurers under the
Commerce Clause of the United States Constitution. The intent of the McCarran-Ferguson Act was to grant states the
explicit authority to regulate insurance in light of the South-Eastern Underwriters decision. Section 2(a) of the act
states: The business of insurance, and every person engaged therein, shall be subject to the laws of the several States
which relate to the regulation or taxation of such business. 15 U.S.C. §1012(a). However, under the act, Congress also
reserved to itself the right to enact federal statutes that “specifically” relate to “the business of insurance.” 15 U.S.C.
§1012(b).
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Regardless of whether health plans are fully insured or self-funded, they are subject to a number
of federal standards, albeit fewer than state health insurance requirements. Two federal laws, the
Employee Retirement Income Security Act of 1974 (ERISA, P.L. 93-406) and the Health
Insurance Portability and Accountability Act of 1996 (HIPAA, P.L. 104-191), have significant
impact on how health insurance is provided. ERISA outlines minimum federal standards for
private-sector employer-sponsored benefits, including health benefits. (Governmental plans and
plans sponsored by churches are exempt from ERISA.) In general, ERISA requires plan
fiduciaries to act prudently and in the best interest of beneficiaries, participants be informed of
their rights, and there be disclosure of a plan’s financial activities. It preempts state laws that
“relate to” employee benefit plans, but provides an exception for state laws that “regulate
insurance.”5 The delineation of issues attributable to the phrases “relate to” and “regulates
insurance” is not clear, and have led to longstanding debates and active litigation over the scope
of ERISA preemption.6
Under §514(b)(2)(A) of ERISA, a state law that relates to an ERISA plan may avoid preemption
if it regulates insurance within the meaning of ERISA’s “saving clause.” This section “saves”
from preemption “any law of any State which regulates insurance, banking, or securities.” Thus,
the savings clause permits states to regulate health insurance without running afoul of ERISA’s
preemptive scheme, and states may therefore impose requirements on health insurers that are
more comprehensive than the requirements set forth under ERISA. However, under
§514(b)(2)(B) of ERISA, commonly referred to as the “deemer clause,” a state law that
“purport[s] to regulate insurance” cannot deem an employee benefit plan to be an insurance
company for purposes of regulation. In interpreting this provision, the Supreme Court has found
that a self-insured health plan cannot be “deemed” an insured plan for the purpose of state
regulation. Accordingly, a plan that provides health benefits through an insurance company can,
in effect, be regulated by state insurance law, as well as by ERISA. On the other hand, a plan that
is self-insured is only subject to ERISA’s requirements, and is immune from state law. 7
While ERISA provides for general regulation of employee benefit plans, the Health Insurance
Portability and Accountability Act of 1996 (HIPAA) specifically regulates health benefits. The
core motivation behind HIPAA is to address the concern that insured persons have about losing
their coverage if they switch jobs or change health plans (“portability” of health coverage).
HIPAA contains health insurance provisions which amended ERISA, the Public Health Service
Act (PHSA), and the Internal Revenue Code (IRC) in an effort to apply broadly to different types
of health plans. HIPAA established federal requirements on private coverage and issuers of such
coverage, including the availability and renewability of coverage for certain individuals under
specified circumstances, limitations on the amount of time that coverage for pre-existing medical
conditions may be excluded, and prohibition of discrimination on the basis of health factors. It
also includes tax provisions designed to encourage the expansion of health coverage through
several mechanisms. Another set of HIPAA provisions addresses the electronic transmission of
health information and the privacy of personally identifiable medical information (administrative
simplification and privacy provisions, respectively).8
5 29 U.S.C. §1144(a)-(b).
6 For more information about ERISA preemption, see CRS Report RL34443, Summary of the Employee Retirement
Income Security Act (ERISA), by Patrick Purcell and Jennifer Staman.
7 For more information about ERISA and health insurance, see CRS Report RS22643, Regulation of Health Benefits
Under ERISA: An Outline, by Jennifer Staman.
8 For more information about HIPAA, see CRS Report RL31634, The Health Insurance Portability and Accountability
(continued...)
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Data Related to Self-Insured Plans
A majority of individuals with private health insurance coverage are enrolled in self-insured
plans. In 2008, 55% of private-sector enrollees were in such plans. This proportion differs when
comparing small firms (less than 50 workers) and large firms (50 or more workers). In 2008, of
the private-sector workers who were employed at small firms with health coverage, 12% were
enrolled in self-insured health plans. In contrast, of private-sector workers employed at large
firms, 65% were enrolled in self-insured plans. Consistent with these findings is the share of
private-sector firms that offer at least one self-insured plan. In 2008, while 34% of all private-
sector firms that offered insurance had at least one self-insured plan, only 13% of small firms had
such a plan, compared with 63% of large firms.9
As reflected in the preceding data, the value of self-insurance to a firm generally is related to firm
size. A large firm typically is able to spread risk across a large pool of enrollees, which means it is
better able to deal with large health care expenses should they occur, compared to a small firm.
Also a large firm is more likely than its small counterpart to have a human resources department
that has the expertise and resources to self-fund health benefits.
While the ability to avoid state health insurance regulations may appear to be the primary reason
for self-insuring, economic analyses do not support this assumption, at least not uniformly. For
example, one study from 1993 found that benefit mandates and premium taxation were not
associated with the decision to self-insure, but small group health reforms were.10 Another study
concluded that while avoidance of state regulation motivated employers’ decision to self-insure in
the early 1980s, by the mid 1980s “regulatory considerations played only a minor role.”11 Such
conclusions are borne out, for example, in more recent comparisons of benefits provided in self-
insured plans to those in fully insured plans. Researchers have observed that self-insured plans
typically include benefits offered in fully insured plans, despite the exemption from state benefit
mandates for self-insured plans.12
Health Reform
The 111th Congress passed the Patient Protection and Affordable Care Act (P.L. 111-148,
PPACA); President Obama signed it into law on March 23, 2010. On March 30, 2010, PPACA
was amended by the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152).
(...continued)
Act (HIPAA) of 1996: Overview and Guidance on Frequently Asked Questions, by Hinda Chaikind et al.
9 Tables I.B.2.b and I.A.2.a, Medical Expenditure Panel Survey-Insurance Component, Agency for Healthcare
Research and Quality, U.S. Department of Health and Human Services, 2008, available online at
http://www.meps.ahrq.gov/mepsweb/data_stats/quick_tables_search.jsp?component=2&subcomponent=1.
10 C. Park, “Prevalence of Employer Self-Insured Health Benefits: National and State Variation,” Medical Care
Research and Review, Vol. 57, No. 3, 2000.
11 G. Jensen et al., “State Insurance Regulation and Employers’ Decisions to Self-Insure,” Journal of Risk and Insurance,
June 1995, p. 210.
12 For example, see J Gabel, et al., “Self-Insurance in Times of Growing and Retreating Managed Care,” Health
Affairs., Vol. 22, No. 2, 2003; M. Matthews, “Lessons from Tennessee’s Failed Health Care Reform,” Heritage
Foundation Backgrounder #1357, 2000, available online at http://www.heritage.org/research/healthcare/bg1357.cfm;
and G. Acs et al., “Self-Insured Employer Health Plans: Prevalence, Profile, Provisions, and Premiums,” Health
Affairs, Vol. 15, No. 2, 1996.
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PPACA imposes new requirements on individuals, employers, and health plans; restructures the
private health insurance market; sets minimum standards for health coverage; and provides
financial assistance to certain individuals and, in some cases, small employers. Among the
provisions in PPACA are ones that would have a major impact on private health insurance
coverage, including self-insured plans.
Health Reform Definitions Relevant to Self-Insured Plans
Under federal law, self-insured plans are considered to be a type of “group health plan.”13 PPACA
refers to this definition of group health plan and applies certain insurance reforms to such a plan.
Because PPACA employs a patchwork approach in specifying which type of private plan would
be subject to which reform, the impact on self-insured plans depends on the provision being
considered. For example, group health plans will be subject to the prohibition on coverage
exclusions for preexisting health conditions, but not subject to community rating rules under
PPACA.14
In addition, PPACA includes grandfathering provisions for existing health insurance plans. A
group health plan or health insurance coverage (either nongroup or group), in which a person was
enrolled on the date of enactment, is grandfathered and exempt from most insurance reforms.
Therefore, self-insured plans that existed on date of enactment are grandfathered plans and
subject only to a handful of the private insurance reforms.15
Private Health Insurance Reforms
PPACA establishes new federal standards and requirements applicable to the private market, with
the aim of increasing consumer access to health insurance, especially for persons with pre-
existing health conditions and for other higher-risk groups. These requirements relate to the offer,
issuance, and renewal of insurance, applicable consumer protections, and costs borne by
consumers, employers, and health plans.
As mentioned above, PPACA requires group health plans (and, by extension, self-insured plans)
to comply with some but not all private reforms.16 Depending on the insurance reform, it may
apply to all self-insured plans (i.e., both new and grandfathered17), or only one type of self-
insured plan (see Table 1).
13 The PPACA definition for “group health plan” refers to the existing PHSA definition of that term, which, in turn,
refers to the ERISA definition (29 U.S.C. §1191b). The term “group health plan” under PPACA includes self-insured
plans.
14 Note that to the extent that PPACA regulates “health plans,” self-insured plans are exempt from those requirements.
See §1301(b)(1) for the definition of “health plan.” The inclusion of definitions for both “group health plan” and
“health plan” in PPACA seems to indicate the intention of using both terms, and underscores the importance of noting
which term is applied to which health insurance standard. For example, group health plans would be subject to the
prohibition on discrimination based on health factors (§1201, adding new PHSA §2705), but health plans that provide
the essential health benefits package would be subject to specified cost-sharing limits (§1302(c)).
15 For additional information about grandfathered plans, see CRS Report, CRS Report R41166, Grandfathered Health
Plans Under the Patient Protection and Affordable Care Act (PPACA), by Bernadette Fernandez.
16 For additional information on the applicability of private health insurance reforms to “group health plans” (among
other types of plans), see Private PPACA.
17 Application of insurance reforms to grandfathered, self-insured plans is based on analysis of specific provisions
(continued...)
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Table 1. Private Health Insurance Reforms Applicable to Self-Insured Plans
Self-Insured Plans
Insurance Reforms
Grandfathered New
Near-Term Insurance Reforms (prior to 2014)
Prohibits lifetime benefit limitsa X
X
Restricts annual benefit limitsa, b X
X
Restricts rescissions
X
X
Requires coverage for preventive services with no
NR X
cost-sharing
Extends dependent coverage to age 26
X
X
Requires uniform explanation of plan benefits
X
X
Prohibits discrimination based on employee
NR NR
compensation
Requires quality of care reporting
NR
NR
Requires reporting of medical loss ratio and
X NR
provision of rebates
Requires internal and external appeals processes
NR
X
Long-Term Insurance Reforms (Beginning 2014)
Prohibits coverage exclusions for preexisting
X X
conditions
Imposes adjusted community rating rules
NR
NR
Imposes guaranteed issue requirements
NR
NR
Imposes guaranteed renewability requirements
NR
NR
Prohibits discrimination based on health factors
NR
X
Prohibits discrimination against medical providers
NR
X
Requires coverage for essential health benefits
NR
NR
Limits out-of-pocket spending
NR
X
Prohibits excessive waiting periods
X
X
Requires coverage for clinical trials for qualified
NR X
individuals
Source: CRS analysis of PPACA.
Note: NR = not required.
a. Benefit limits based on essential health benefits.
b. Beginning in 2014, this provision will prohibit annual limits of any kind.
(...continued)
discussed earlier: (1) the applicability of grandfathering provisions to “group health plans,” and (2) the distinction
between the terms “group health plan” and “health plan,” with the former including self-insured plans and the latter not
including self-insured plans. As noted in footnote #14, inclusion of both terms in PPACA indicates the intention to
apply them to insurance reforms, depending on the provision. Moreover, interim final rules issued by HHS, Labor, and
Treasury (regarding dependent coverage for children under age 26) states the Administration’s intention to distinguish
between “group health plan” and “health plan” for the purpose of adding PPACA provisions to existing federal
requirements. The rules are available at http://www.hhs.gov/ociio/regulations/pra_omnibus_final.pdf.
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Health Insurance Exchange
PPACA will establish health insurance exchanges, similar in many respects to existing entities
like the Massachusetts Connector and eHealthInsurance, to facilitate the purchase of health
insurance by certain individuals and small businesses. An exchange will not be an insurer; it will
provide eligible individuals and small businesses (and large businesses at the state’s discretion)
with access to insurers’ plans in a comparable way (in the same way, for example, that
Travelocity or Expedia are not airlines but provide access to available flights and fares in a
comparable way). Exchanges will have additional responsibilities as well, such as negotiating
with plans and determining eligibility for and administering premium and cost-sharing
subsidies.18
Because the plans offered through an exchange are offered by insurance carriers for purchase by
individuals and groups, by definition exchange plans will not be considered self-insured.
Employer Requirements
PPACA does not mandate an employer to provide employees with coverage; however, beginning
in 2014, it does impose requirements on certain employers. A large employer (as defined in the
law) with at least one full-time employee (based on a 30-hour work week) who receives a
premium credit through an exchange may be subject to a penalty.19
The employer requirements under PPACA do not depend on the funding for an employer plan. In
other words, the potential imposition of an employer penalty will not be contingent on whether
the plan is self-insured or fully insured.
Taxes on Health Insurance Plans
PPACA will impose three different fees on health insurers: The first is a 40% excise tax on issuers
of high-cost health plans (defined as those with premiums exceeding $10,200 for single coverage
and $27,500 for family coverage in 2018).20 In addition, there is an annual fee on health insurers
based on their market share. Finally, PPACA will impose an annual fee on health insurance plans
to fund comparative effectiveness research. This additional fee will be calculated by multiplying
$2 per insurance product by the average number of covered lives.
Under PPACA if an employee has “applicable employer sponsored coverage” and the cost of such
coverage exceeds the premium limits described above, then issuers of such coverage will pay a
tax. This term is defined to include “group health plans,” which includes self-insured plans. In
18 For additional information about exchanges and premium credits, see CRS Report R41137, Health Insurance
Premium Credits in the Patient Protection and Affordable Care Act (PPACA), by Chris L. Peterson and Thomas Gabe.
19 Such employers will be exempt from paying a penalty if they have 30 or fewer full-time employees. Actual penalty
amounts are calculated using formulas specified in the law. For additional information about employer requirements,
see CRS Report R41159, Summary of Potential Employer Penalties Under the Patient Protection and Affordable Care
Act (PPACA), by Hinda Chaikind and Chris L. Peterson.
20 These thresholds will be adjusted for certain high-risk groups. For additional information about this and other
revenue provisions under PPACA, see CRS Report R41128, Health-Related Revenue Provisions in the Patient
Protection and Affordable Care Act (PPACA), by Janemarie Mulvey.
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contrast, the annual fee on insurers will not apply to sponsors of self-insured plans, among other
plan entities. The tax to fund comparative effectiveness research will apply to self-insured plans
in the same manner as the tax will apply to fully insured plans.
Author Contact Information
Bernadette Fernandez
Analyst in Health Care Financing
bfernandez@crs.loc.gov, 7-0322
Acknowledgments
Jennifer Staman contributed the discussion on ERISA preemption. Janemarie Mulvey also made
contributions to this report.
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