Life & Health Insurance Exam (National Portion)Health InsuranceMedium
A small business owner wants to provide health insurance for their employees but is concerned about the unpredictable nature of claims and wants to limit their maximum liability. Which funding arrangement would best suit their needs?
- AAdministrative Services Only (ASO) contract
- BSelf-funded plan without stop-loss
- CMinimum Premium Plan (MPP)
- DFully insured plan
Show answer & explanationAnswer & explanation
Correct answer: D. Fully insured plan
In a fully insured plan, the employer pays fixed premiums to an insurance company, and the insurer assumes all financial risk for claims, thereby limiting the employer's maximum liability. Self-funded plans and ASO contracts place more risk on the employer, even with stop-loss in some cases, which only caps catastrophic claims.
Why the other options are wrong
- A. An ASO contract is for self-funded plans, where the employer retains financial risk for claims.
- B. A self-funded plan without stop-loss would expose the employer to unlimited claim liability.
- C. A Minimum Premium Plan is a type of self-funded arrangement where the employer still bears the primary risk.
Fully Insured Plan
An employer pays premiums to an insurance company, which then assumes the full financial risk for employee claims, limiting the employer's maximum liability to the premiums paid.
- Insurer bears claim risk.
- Employer pays fixed premiums.
- Predictable costs for the employer.
Memory trick: Fund Your Health: Risk or Reward?