The Affordable Care Act has made self-insurance a more viable option for small companies.
In the new system of health care, employers are looking for options, one of those is self-insuring.
Self-insurance is just what it says: rather than a carrier paying claims with premium dollars it collects, as is the case with fully-insured plans, with self-funded plans, incurred claims are paid with a combination of employer and employee money. When self-insuring, an employer takes on some of the risk and administration of their employee benefit plan. The potential return for taking on such risk is that employers of properly structured self-funded plans often realize lower health care costs because money is only spent when claims are incurred.
The key to any good self-funded plan is to know your populations. Companies with a large number of employees who are aging or who have a chronic illness may not be good candidates for self-insuring. Conversely, if an employee base is fairly healthy or young, the potential savings could be huge.
Self-insured plans used to be popular only among large companies; however, with changes that arose due to the Affordable Care Act, it is now a more appealing option for smaller businesses.
The following are four factors employers should be aware of when considering self-insurance:
1. Employers could save money on insurance over time. Immediate savings come from eliminating the 2% to 3% premium tax built into fully insured plans that are offered by insurance providers. Also, because employers can design a health plan for their specific employees, it eliminates waste on unnecessary or irrelevant programs.
Self-insuring allows companies to pay only for the claims their employees make. “All you're doing is betting on the health care expense of your population,” said Joe Part, founder and managing partner at Alltrust Insurance. “If you win, statistically you'll save 10% or 20% — that's a lot of money. If you lose, then statistically you'll pay 10% more than if you were fully funded.”
What's more, when employees know their company's own funds are at risk as the primary insurer, employees have more of an incentive to make wise financial decisions when it comes to taking care of their health care needs, which, in turn, benefits the company's bottom line.
2. Employers take a financial risk if employees make many or large claims. A major difference between employers who choose to be fully insured by a health insurance provider and employers who choose to self-insure is their comfort level with the risk.
Self-insurance places more of the risk on the company.
But even that risk can be mitigated to some extent. Many companies that self-insure also purchase reinsurance — also called stop-loss insurance. This means a stop-loss carrier will pay a portion of medical expenses if an individual's claims exceed stop-loss limits, or if a group's claims go over a percentage of what is expected.
USA Today noted recently that stop-loss coverage can kick in when medical costs per worker are as low as $25,000. With low stop-loss limits, an employer can significantly mitigate the potential risk associated with self-funded plans.
3. Employers have control over the health plan. Instead of having to go along with what an insurance company determines is important for a health plan, the employer can make those decisions. This is especially helpful when looking at what might be unique to a company's group of employees.
The employer also has access to robust claims data, which allows decision-makers to see what types of programs and coverage are needed. Being able to customize a plan around a particular company's specific needs offers a much greater opportunity to address those needs, and ultimately drive lower healthcare costs.
Employees may benefit from customized plans that a large carrier cannot offer. For example, a group of employees who are older than 50 may not need to pay premiums for maternity benefits, while a group of young employees may not need to pay premiums for certain medications.
4. Employers are responsible for following health insurance regulations. In most cases with fully insured plans, the carrier is responsible for ensuring compliance with ACA and other applicable regulations. When self-insured, an employer takes on more of that responsibility. However, following those regulations is less difficult than some may think. The Self-Insurance Institute noted that the regulatory concerns for an employer choosing self-insurance is not much different when purchasing fully funded insurance for employees.
Although self-insurance may not be for everyone, “we are finding it to be far more appealing for companies of all sizes when compared to just a few years ago,” Part said.