Should your company self-insure its health plan? Here’s what you need to know to decide.
Almost all (nearly 95 percent) of U.S. companies with at least 5,000 employees currently self-insure their employee health plans. But health cost inflation and increasing regulatory burdens make self-insurance a more attractive option even for smaller employers. Today, the self-funded market now includes nearly 60 percent of all employers, small and large.
With a self-insured or self-funded group health plan, the employer assumes the financial risk for providing health care benefits to employees. In practical terms, self-insured employers pay for each claim as it’s incurred instead of paying a fixed monthly premium, as they do under a traditional health plan.
Flexibility and lower overall costs are two main reasons companies self-insure. Unlike insured plans (also known as fully funded plans), self-funded plans are exempt from state regulation, including mandated benefits, premium taxes and consumer protection regulations.
Self-insured plans fall under regulation of the Department of Labor and ERISA, the federal Employee Retirement Income Security Act. Self-funded plans are also exempt from some provisions of the Affordable Care Act. For example, all insured health plans must provide coverage for services and supplies within ten “essential health benefits” categories. They must also provide these benefits with no annual or lifetime caps. The law exempts self-funded plans. However, if they do provide coverage for any of these “essential health benefits,” they cannot place annual or lifetime caps on them.
Control and flexibility. Having a consistent set of benefits for a nationwide workforce is a good reason to self-insure. Many states require certain coverage levels for mammograms, cancer therapies, mental health services, contraceptives or diabetic supplies, for example. While a fully insured company operating in more than one state must deal with each state’s varying health insurance regulations and benefit mandates, a self-insured plan is not bound by state statutes. Companies with facilities in different states can streamline their health plans, offering only those services required under federal law. The employer is free to contract with any providers or provider networks to customize a plan, instead of purchasing a “one-size-fits-all” policy.
Cost savings. Self-funded companies save on state premium taxes, which can be up to three percent. Administration fees for self-insured plans generally amount to no more than seven percent of total costs, according to healthcare consultants, compared with 10 percent or more of insurance premiums. And employers can save up to five percent without the profit and risk charges that insurers factor into their premiums.
Self-funding also keeps any cost savings within the company. The employer maintains control over health plan reserves, enabling the employer to maximize interest income. Under an insured plan, the insurance carrier would invest reserves and earn any profits. And since there is no pre-payment for coverage, self-insured companies can benefit from improved cash flow.
Worth the risk? The main downside of self-insuring is assuming the risk of unpredictable medical claims and the annual fluctuations in costs that the insurer often absorbs for a fully insured plan. Self-insured employers can protect themselves against unpredicted or catastrophic claims by purchasing what is known as stop-loss insurance to reimburse them for claims above a specified dollar level. Note that a stop-loss policy is a contract between the stop-loss carrier and the employer, not a health policy covering individual plan participants.
But even with stop-loss coverage for catastrophes, self-insured employers might face unexpected costs due to underwriting tools such as “lasering.” This occurs when reinsurance carriers charge a small company a much higher deductible to cover employees with serious illnesses than the rest of the group. And the employer would have to cover the deductible for those employees if they have major medical expenses during the year. Self-funding may also cause companies to lose some of the deeper discounts that insurers can arrange with providers. And, after switching to a self-insured plan, an employer that wants to revert back after a few expensive claims would likely find a sharp increase in premiums, as the insurer would factor in the risk of covering those individuals.
Yet self-funding might be worth the risk for many smaller employers. Estimates show that self-insured businesses with 200 employees have a 14 percent probability that actual claims will exceed projected budgets, while companies with 1,000 employees have a 26 percent chance of surpassing their health insurance budgets. Why? The larger the number of employees, the more likely that one or two will incur catastrophic health care costs.
Self-insured employers can either administer claims in-house or subcontract with a third party administrator (TPA). TPAs can help set up self-insured health plans, coordinate stop-loss insurance coverage and oversee provider network contracts and utilization review services. For plans that require employee contributions toward coverage, the company’s payroll department handles employee contributions, as it would in a fully funded plan. However, instead of sending employee contributions to an insurance company for premiums, the employer holds contributions until claims become payable. If the employer is using contributions as reserves, it holds them in a tax-free trust controlled by the employer.
The bottom line: Employers that self-fund control their own destiny. Self-insuring changes the focus to managing healthcare dollars, instead of negotiating premiums with an insurer. For further information on whether self-insuring your employee health plan is right for you, please contact USI.