The Two Types of Employer-Sponsored Insurance - Knowing the Difference

What You Need to Know

Different laws, timelines, and appeals criteria apply depending on whether an employer health plan is self-funded or fully funded.

Employers that offer health insurance to their employees do so in one of two ways.

Self-Funded Plans. Some employers - typically larger ones - opt for self-funded plans, meaning the employer pays for its employees' healthcare costs itself. These kinds of plans - also called self-insured plans - typically feature a third-party administrator that handles claims processing for the employer. A federal law - ERISA - governs self-funded/self-insured plans.

Fully-Funded Plans. Other employers, including most small businesses, offer "fully-funded" plans, meaning that the employer purchases health coverage from the insurer and the insurer assumes the risk of paying claims. Unlike self-funded plans, fully-funded ones are governed by state law.

Key Differences. Because federal law governs self-funded plans, coverage and appeal deadline standards are consistent no matter which state(s) the employer is in. In contrast, more variability exists in fully-funded plans, as different states may have different requirements.

One Important Similarity. Whether the plan is self-funded or fully funded, neither will reconsider denials based on purely contractual grounds. For example, if the health plan excludes certain categories of service, such as cosmetic procedures or alternative therapies, the denial rests on contractual grounds, not clinical ones. Since the plan document excludes those items contractually, you cannot seek reconsideration through the external review process.

 What this Means for You

When appealing a denied claim, make sure you confirm whether the plan is self-funded or fully funded. A quick rule of thumb is that if you're dealing with a small employer, the plan is most likely fully funded. A 2023 report from the Employee Benefit Research Institute revealed that only 13% of employers with less than 100 employees self-insured, while 82% of employers with more than 500 employees did. However, to verify this with certainty, you should have your patient call the relevant employer's HR department to confirm whether the plan is self-funded or not.

If the plan is fully funded - and therefore, regulated by the state - make sure to understand that state's external review requirements. A good starting point in most states is the applicable Department of Insurance.

Finally, remember that services that the health plan excludes from coverage contractually - for example, cosmetic procedures - will not be eligible for external review. Denials on medical necessity and experimental grounds, on the other hand, are generally eligible for external review. (Note: there may be some variability in fully funded plans regulated by states.)