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Self-funded insurance plans are becoming increasingly popular among employers of all sizes. Once thought to be a viable solution only for the largest of companies, changes in health care regulations and skyrocketing costs now make self-insurance an attractive option for mid-size and even small businesses. Their employees can reap distinct benefits, too.
For these reasons, many employers now see self-insurance as not only a means to curb costs, but an opportunity to give their benefits program a healthy shot in the arm.
Self-Insurance on the rise
Today, 82% of covered employees who work for the nation’s largest companies have insurance plans that are wholly or partially self-funded by their company, according to the Kaiser Family Foundation/Health Research & Education Trust. Large employers have the financial resources to support unforeseen catastrophic expenses, and they have correspondingly large pools of employees, so the risk is spread over a much larger population. Smaller firms typically do not.
Nonetheless, managing health care costs is a critical need for every business.
Employer benefits of self-funding
The Self-Insurance Educational Foundation says cost savings in non-claims expenses alone can range from 10% to 25%. Saving money may be the primary driver when companies decide to self-insure, but there are other benefits as well.
Employers can eliminate costs for state insurance premium taxes. And they don’t have to adhere to state-mandated coverage requirements. That means they can design a health care package tailored to their own employee population. They can choose to include vision, dental, prescription, and workers’ comp as well as medical coverage. They can also emphasize wellness programs, as a means of reducing claims and encouraging healthier workers.
HR managers can consider their employee population to customize benefits packages. A company with primarily younger employees might want boost family planning coverage. A construction firm might want to offer a broader range of chiropractic or acupuncture coverage to help treat injuries. HR personnel could even survey employees to learn what coverage options they want most.
Self-funded companies also have access to all their employees’ claims data, something not available to them through traditional health care programs. This means they are no longer shooting in the dark when it comes to forecasting and planning health care expenses. They can study the data to see the types of claims most prevalent among their employees, and the costs associates with each type.
Not only does this improve budgeting, it also tells employers how they can modify their plan to be more relevant and where they can help reduce claims by providing more educational or programmatic resources. The more data a company accumulates, the better they can manage benefits and control costs.
Under the Affordable Care Act, insurance rates are based on a “community rating” that considers only age, location and tobacco usage. One company’s healthy employees in effect pay to support costs of less healthy employees in other companies. Instead, self-insured companies need only consider their own employee “community.” Healthy groups generate fewer claims, so costs can be lower.
Employee benefits of self-funding
From a functional standpoint, the switch from traditional health insurance to a self-funded plan is usually seamless for employees. They can see the same doctor, etc., though they may be issued a new card to use. If the employer chooses to partner with a third-party health care consultant, employees gain a resource to help them understand their coverage and find the most convenient, least-cost sources for treatment.
For example, many tests such as X-rays and MRIs can be administered in a medical office or clinic rather than the requiring the patient to go to a hospital.
Offering wellness programs and more relevant coverage options can increase employee job satisfaction. In turn, that helps companies retain employees and boosts their position when it comes to recruitment competitiveness.
Potential downside
Of course there is more to health insurance than delivery of services. Companies considering making the switch to self-funding must determine details such as what will or will not be covered. Who will decide to deny coverage, and how will an appeals process work?
There are also costs of administering the plan, from enrollment to processing claims and managing provider networks. This can be a highly complex and challenging undertaking, given HIPAA and other compliance regulations. While some companies choose to handle this work internally, most mid-size and smaller businesses, in particular, opt for outsourcing to a third party administrator, or TPA. As noted earlier, some companies also outsource employee liaison services, to help employees take full advantage of their coverage.
But there is one inescapable fact: a huge claim could conceivably put a small business out of business. While this might be an extreme scenario, the reality is that costs associated with traditional health insurance remain the same over a year, while self-insurance costs fluctuate. Accidents and illnesses are not predictable.
Smaller employers (and even many larger ones) are protecting themselves against this risk by purchasing stop-loss insurance. This caps their liability, whether catastrophic costs result from one individual’s claims or the aggregated total rises beyond a certain threshold. Stop-loss insurance effectively levels the playing field, making self-insurance a viable option for almost any size company.
So who should consider self-insurance?
Small employers, especially, struggle to provide health insurance to employees. Increasingly the only solution has been to require employees to pay an ever-increasing portion of their premiums while inadvertently forcing them to choose high-deductible plans. Kaiser says the amount employees contribute toward their health premiums has gone up 80% in the past 10 years.
The result is that many employees pay a lot but never actually get to use their insurance. It is not seen as a “benefit.” Some HR experts say frustrated employees are leaving their small employers and taking positions with large companies, just to acquire affordable, useful health insurance. This frustrates HR managers who are themselves struggling to find innovative, valuable benefits to lure and keep a top-quality workforce.
Who knows how the health insurance landscape will change as the “repeal and replace” debate continues in Congress? With self-insurance, employers can at least give themselves and their employees greater control over costs as well as improved benefits.
