Almost every employer that offers a group health benefit program is searching for methods to lower their company’s spending.
There are several ways to cut health insurance spending that are probably familiar, such as modifying plan designs, changing insurance companies and shifting more costs to employees. What many employers don’t consider is shifting from offering an insured health plan to self-insurance, says Aaron Ochs, consultant and project manager at JRG Advisors.
“The market is rapidly changing. Because of the effects of the Accountable Care Act and ever escalating costs, self-insurance — normally considered a funding method only available to large employers — is becoming a viable option for employers as small as 25 employees or less,” Ochs says.
Smart Business spoke with Ochs about who should consider getting a self-insured plan.
How does self-funding work?
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 pooled into 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 the 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. According to a recent Kaiser Foundation survey, among employers with 200 or more workers, 82 percent of employees are self-insured. Conversely, only 13 percent of employees in firms with three to 199 employees are in a self-insured plan.
What do employers need to know before starting a self-insured plan?
Self-insurance is not the right approach for every employer. Some companies will benefit from such an arrangement, others will not. An employer should consider that:
- Self-funding can provide more control over your health plan. Coverage can be customized since you are not 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.
- A self-insured company pays health claims as they incur, 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, the reverse is also true in that you will 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. The premium takes into account the insurer’s overhead costs, including advertising, technology, legal, etc., some allowance against their own financial risk and a profit margin. Self-insured employers don’t have to pay these hidden costs, but they do incur other expenses like third-party administration of claims and the premium for stop-loss insurance.
In addition, workforce demographics can make a self-insured solution either more or less attractive. Young and healthy employees do not necessarily guarantee a less expensive self-insured solution. Nor will older and unhealthy employees always break the bank. Always remember that 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