Pros and cons Featured

8:25am EDT February 25, 2005
Your colleagues tell you most Fortune 500 companies self-insure, and you've heard that self-insured companies have more control over their claims and expenses, making costs more predictable.

It's all true. It's also true that some companies switched to self-insured programs and increased their costs by $1 million. They lost carrier discounts, increased their risk of ending up with no coverage for run-out claims and increased their internal administration costs.

Self-insuring can be either a great way to reduce expenses or a disastrous path to higher costs and loss of employee satisfaction.

To self-insure

Self-insurance is one method of funding the cost of health care insurance. Self-insured companies do not purchase conventional insurance; instead, they pay for the claims directly, usually through the services of a third-party administrator (TPA), with stop-loss insurance in place to cover abnormal risks. The same kinds of plans, networks, benefits and limitations can be included in both fully-insured and self-insured plans.

Self-insuring can give an employer greater control over benefit designs and costs by avoiding most state mandates and state premium taxes, saving more than 7 percent in costs. That could mean a realized savings of hundreds of thousands -- if not millions -- of dollars in a single year.

Not to self-insure

Self-insuring shifts the risk, onus and potential administrative headaches from a carrier to the employer. Self-insured employers are responsible for selecting a suitably comprehensive health care network, analyzing provider discounts and selecting a reputable utilization review and case management company, as well as a TPA.

Self-insurance may be a poor choice if you have an older employee population that is at greater risk for unexpected, high-dollar claims. These claims can disrupt projected cash flow and affect your bottom line.

Such claims can't be anticipated, and can quickly drain financial reserves. An ideal organization for self-insuring should have more than 100 young, male employees on the plan.

Stop-loss insurance is essential when self-insuring because it protects against higher-than-expected catastrophic claims. However, carriers can "laser" individuals with higher risks, meaning an employer would have to pay a much higher claim before the stop-loss kicks in. Self-insured companies can also lose carrier discounts they previously enjoyed.

There are other hidden risks to self-insuring. A poorly chosen or executed self-insurance plan and network causes disruption among employees and resentment toward management and can affect employee recruitment and retention.

Help

If you decide that self-insurance is the right option for your company, it's beneficial to enlist a benefits broker. A savvy broker knows to evaluate key factors.

* Reserves. A company must have enough in reserve to cover run-out claims and other costs that might occur.

* Reinsurance. If the language of your existing reinsurance contract does not match your actual health benefits program, you may be paying for coverage you don't need and can never use. Your broker must be familiar with the intricacies of reinsurance as it relates to your specific requirements.

* TPAs. A TPA is, by definition, an administrator of payment claims. Are its network alliances in your best interest? Is it negotiating sharply to build the best network for you? Is it enough? An objective independent broker can help find a solid TPA that participates in networks that you and your employees need.

Self-insuring can be a viable and money-saving alternative for some businesses. It is possible to control insurance costs, protect your financial investment in your company and provide your employees with the benefits package they deserve.

The key to achieving maximum efficiencies with any insurance program lies is obtaining accurate and objective counsel.

Ron P. Weiss is senior vice president for Corporate Synergies Group Inc., a full-service employee benefits brokerage and consulting firm in the Philadelphia region. He has been a benefits consultant for more than 14 years, specializing in short- and long-term strategic planning for his clients. For more information on the benefits service brokers offer, go to www.corpsyn.com or call Corporate Synergies at (877) 426-7779.