Almost every employer that offers a group health benefit program is searching for methods to lower the company’s spending. To cut health insurance spending, employers can modify plan designs, change insurance companies and shift more costs to employees. These methods, however, often only provide a temporary Band-Aid solution, rather than a long-term strategy to effectively and efficiently manage an employee benefits program.
“Because of the effects of the Affordable Care Act and ever-escalating costs, employers need to focus on where their medical dollars are being spent, to accurately assess what plan changes need to be made in order to be more efficient and stabilize costs,” says Domenic Pascucci, a consultant at JRG Advisors. “Self-insurance — normally considered a funding method only available to large employers — is now a viable option for employers as small as 25 employees or less.”
Smart Business spoke with Pascucci about self-funded health plans and how they might fit in with your employee benefits.
What’s important to understand about self-funding?
As the term implies, in a self-insured or self-funded health plan, the employer takes on direct financial responsibility for employees’ health care costs. Rather than being in a larger risk pool, the self-funding employer takes on the risk for its own employee group.
Some customization can be applied to the structure of these contracts. For example, all of a health plan may be self-funded, or a contract might be purchased to cover certain types of claims. Most self-funded employers buy stop-loss insurance to cover catastrophic claims, capping their financial risk exposure.
Self-insured health plans are exempt from most state insurance laws and mandates, and not having to pay regular premiums to an insurance company can result in substantial savings. An employer also only pays for the claims that actually occur, not the claims an insurance company projects may occur.
Despite these advantages, many employers, especially smaller ones, tend to avoid self-funding — perceiving it as too risky. A recent Kaiser Foundation survey found 82 percent of employers with 200 or more workers are self-insured. Conversely, only 13 percent of employees in firms with three to 199 employees are in a self-insured plan.
How does a business owner know if self-insurance is right for his or her company?
Self-insurance is not the right approach for every employer. Some companies will benefit from such an arrangement; others will not.
Self-funding can provide more control. Coverage can be customized since you aren’t purchasing a pre-packaged product. Self-insured plans are subject to ERISA, but aren’t bound by state insurance laws and state coverage requirements. You can truly meet employee health care needs with a plan that makes sense.
As a self-insured company, you pay health claims as they occur, rather than paying a monthly premium regardless of actual claims activity. This can be attractive, especially during periods where health claims are low. On the other hand, you have to handle large claims as they come in. Remember, however, that stop-loss insurance limits this exposure and there are other methods to minimize payment swings, such as level funding.
When you pay a premium to an insurance company, you pay for more than just claims. It takes into account the insurer’s overhead costs, including advertising, technology, legal, allowance against their own financial risk and a profit margin. Self-insured employers don’t pay these hidden costs, but they incur other expenses like third-party administration of claims and the premium for stop-loss insurance.
Workforce demographics also can make a self-insured solution either more or less attractive. Young and healthy employees don’t necessarily guarantee a less expensive self-insured solution; nor will older and unhealthy employees always break the bank. Remember, self-funding means your company bears the risk associated with your employees, along with the protection of a stop-loss carrier.
It’s worth closely analyzing this risk with a professional who can give you well-thought-out estimates of your company’s potential liability. Only then will you be able to intelligently decide whether self-insurance is for you.
Insights Employee Benefits is brought to you by JRG Advisors