For most companies, the idea of self-insuring their health plan used to feel far too risky. Who would want to go out on a limb like that – totally responsible for employee health care claims, without the “safety net” of some big insurance carrier? In recent years, however, interest in self-funded group health plans has grown substantially among employers. And not only big companies with hefty financial reserves or cash flow.
What’s sparking all this new interest? Should your company jump on the self-insurance band wagon? Maybe. But the cost-benefit bottom line differs from one organization to another, so it’s important to understand all the potential pros and cons before making such a momentous switch.
What is self-insurance?
In the traditional health insurance model (known as fully-insured plans), the employer pays a monthly premium to an insurance carrier, which covers employee claims according to the contracted group policy. The insurance company makes a profit by investing the premiums it receives, earning interest and also spending less on claims than collected.
With self-funding, no insurance carrier is involved. An employer creates a dedicated fund and assumes 100% responsibility to pay employee health care claims. They can still require workers to contribute something to the fund, just as individuals might pay part of their traditional insurance premium. To protect themselves again catastrophic, unforeseen expenses – when an employee is in a terrible accident or is diagnosed with cancer – companies can purchase stop-loss insurance. These policies, which are considered a risk management tool and not “health insurance,” cover costs incurred above a pre-set threshold.
The downside of self-insurance
Your company has to maintain a large enough fund (or have consistently strong cash flow) to pay employee health claims as they are incurred. That’s a lot easier for large enterprises than it is for smaller, typically cash-strapped, firms. And medical claims are not predictable, further exacerbating the resource management issue. In the past, this was the primary reason many employers did not consider self-insurance to be a viable option.
What has changed so dramatically in recent years is the health care environment. Rising costs. Rising employee dissatisfaction with traditional options. Uncertainty about the overall future of health care.
The upside of self-insurance
The Self-Insurance Institute of America notes that businesses with as few as 25 employees are now able to self-fund their health plans, because the benefits outweigh the potential risk. For example:
With fully-insured plans, the provider dictates coverage details and employees have to make do within the parameters of a given policy. Self-insuring employers can custom-design a plan that fits the health care needs of their own workforce. Are employees older? Younger? Singles? Families? What coverages do they value most?
Employers also contract directly with health care providers or groups, so they can pick those that are most appropriate, comfortable, and convenient for their employees. And they can negotiate pricing.
Instead of an insurance carrier earning money on premiums, the employer earns interest on money in their health care reserve. They have total control over the funds. Not having to make substantial monthly premium payments also consistently and predictably boosts cash flow.
Self-funded group health plans are not subject to state taxes or regulations. That means employers don’t have to pay state taxes on premiums, which typically run about 2-3% of premium dollar value. Nor do they have to comply with state-mandated rules regarding benefits. This saves time and effort that would otherwise be devoted to keeping up with regulatory changes, record-keeping, and reporting.
However, self-insured plans are governed by numerous federal laws, primarily ERISA (Employee Retirement Income Security Act) but also HIPAA, COBRA, the Americans with Disabilities Act, and a few others.
Self-insured companies may choose to handle all the associated paperwork, including processing claims, internally. Or they can contract with a third-party administrator (TPA) to do this work. A TPA can streamline the entire process, from setting up the self-funded group plan and choosing providers or networks to analyzing usage as the plan moves forward. But, of course, there’s a fee for that.
Getting more for less
For a growing number of employers, the appeal of self-insurance comes from the ability to control health care outcomes as well as costs. The Harvard Business Review recently profiled Walmart’s efforts to proactively improve the quality of care employees receive by controlling where they are treated – even if that means traveling quite some distance from home. Walmart can do that because they are self-insured.
The retail icon is zeroing in on health care centers of excellence. These facilities have three critical traits:
- They specialize in a particular procedure or narrow range of procedures
- They charge lower rates
- They have proven records of superior outcomes
The best care, at the best price. A growing number of employers are experimenting with this, using incentives to encourage employees to choose centers of health care excellence over other providers.
Of course, Walmart has plenty of resources. They are the world’s largest employer, insuring more than a million American workers and their families. But along with greater size comes greater challenges. Like all multi-state companies, Walmart grapples with the sometimes-dramatic fluctuation in health care costs from one state to another. Even small companies know that costs can differ considerably from one part of town to another.
Because self-insured firms negotiate their own contracts and choose their own providers, they have greater ability to control the cost-vs-quality narrative. That benefits employees as well as the company, because it can lower individual out-of-pocket costs.
Nonetheless, the Society for Human Resource Management suggests that “employers are not being bold enough with their self-insurance strategies.” For one thing, they say, companies don’t even know exactly what they are paying for medical treatments or other health care details. They quote one benefits broker: “Any CEO in the country can quickly look up what they pay for paper clips, but when you ask the same question about a back surgery, they don’t know the cost.”
There’s no excuse for that, says SHRM, since 90% of what most companies spend on medical claims is spent on just 350 different procedures.
Companies that hire a third-party administrator often don’t realize that most TPAs don’t audit lower dollar-value claims, with “lower” typically defined as less than $50,000. Employers who take the time to scrutinize all their claims report finding thousands of dollars in simple mistakes – expenses paid that should not have been covered, duplicate payments, etc.
But is self-funding right for your company?
The switch is on. The US Census Bureau’s Medical Expenditure Panel Survey for 2016 (the most recent reported) says that 41% of employers now offer at least one type of self-insured plan, and that small businesses report the fastest-growing adoption. Nonetheless, not every organization is a good candidate. If your workforce is predominantly older, chances are good that you will see more, and higher-cost, claims. If your turnover is consistently high, it might not be worth it to invest in improving the health of someone who won’t be around long.
For most companies, though, large or small, self-insurance may be healthiest choice.