Any employer considering self-fundingfor health benefits or workers’ compensation needs to understand thebenefits as well as the risks. While there arecertainly savings to be had by not workingwith an insurance company in the traditionalsense, companies have to consider whetherthey’re comfortable handling their worst-case claims scenarios without this safety net.It’s also important to manage the programwell to see the kinds of cost savings companies are anticipating.
“The ideal thing is to hire an independentfirm to help evaluate various proposals andoptions and help train the internal people tosupervise the program on a day-to-day basis,”says Rob Wilson, president of EmploycoGroup, a division of The Wilson Companies.
Smart Business spoke with Wilson to get ahandle on the benefits, risks and responsibilities that go along with self-funded insurance.
How does self-funding differ from fullyinsured plans?
Under the fully insured plan, you incur apredetermined expense called premium totransfer the payments of claims to an insurance company, whether it’s workers’ compensation or health insurance. The insurancecompany will typically pay your insurancebroker a commission, make a profit and havesignificant cash flow while earning investment income.
Under a self-funded plan, the business owners incur all the expenses, including payingthe claim and paying a third-party administrator to adjust the claim; anything left overgoes to their bottom line. They’re eliminatingsome of the expenses that they incur if theyfully insure their program. They don’t have topay a broker commission or pay dividends toshareholders. It’s a way of reducing theirexpense if they can measurably control thepotential for losses.
How can businesses control losses?
With workers’ compensation, you can doeverything possible to fight fraud, maintain asafe work environment, supervise theemployees very effectively and keep a well-run organization. There are a lot of controlsthat you can implement to reduce your exposure and reduce your costs when self-funding. In contrast, when self-funding medicalinsurance, you can’t control the health ofyour employees or their dependents. Youmay not know if somebody has a health condition or a child with a long-term health problem. When you’re hiring someone, you can’task during an interview about someone’smedical history.
Should a company that is self-funding consider stop-loss insurance or reinsurance?
With this insurance, a business owner mayhave a maximum loss of $50,000 or $150,000,and then the insurance company takes overall excess payments from there. With healthinsurance, you can limit a claim to $1 millionas far as benefits to employees. And withworkers’ compensation, you’re regulated bythe state on what the employee is entitled toreceive if injured on the job.
You’d want to look at buying stop-loss orreinsurance to try and limit your exposure oneither a per-claim basis or an aggregate basisfor your overall plan. For health insurance,it’s important because of all the unknowns.But even with workers’ compensation, youface a risk with self-funding.
How can businesses know if self-funding isright for them?
We typically would not look at self-fundinga workers’ compensation program until thecompany’s standard premium is in the areaof $250,000 or higher. Because all it takes isone claim and there goes your entire savings.For health insurance, you can probably consider self-funding with a low stop-loss if youhave maybe 35 or 40 employees. Lower thanthat it’s not typically practical. With 50 or 100employees, you’re going to have a low stop-loss, limited to a $10,000 or $20,000 claimwith an overall aggregate. The whole theoryof self-funding is that you should be spending enough dollars to absorb those claims.
Even when a company self-funds theirhealth insurance they still have to determineif what they’re paying for all the insurance-related costs — the excess coverage, the lifeinsurance and third-party administrator — iseffective.
Companies also have to consider thepotential cost to them if the program goespoorly and they’re suddenly hit with five orsix serious claims. For example, if youremployees know the company is going to layoff 50 people in the next 30 days, you maysuddenly see a rash of soft-tissue backinjuries. With health insurance, that’s less ofa problem, but for workers’ compensation,you just have to look at your past record andwhat your plans are for the coming year.
Are plan structures different with self-funding?
As a business owner, you still have thesame flexibility to duplicate the benefits thatyou have. But instead of having a $2 millionannual limit for employees or families, youcan say you only want $1 million. You cantheoretically say you’re not going to pay forcertain procedures. You can design a program that meets many of the employees’needs but, more importantly, enables thebusiness to sustain its operations. Becausethe idea is to reduce your expenses.
ROB WILSON is president of The Wilson Companies, which handles human resources outsourcing, staffing and insurance for 400small and medium-sized Midwest companies. Reach him at (630) 286-7345 or firstname.lastname@example.org.