Self Insured Health Plans

Small companies (under 200 employees) usually provided health insurance to employees the conventional way, paying premiums to an insurance company that cover medical claims. They could potentially save money by self-insuring, a strategy typically used by much larger companies. They could pay directly for the medical care of the employees and family members on its plan, setting aside the cash they would have spent on premiums to cover claims and paying an administrator to process them. To limit risk, the group would also purchase “stop-loss” insurance that would kick in after any individual’s medical bills exceeded $100,000.

This  approach is common for corporations with thousands of employees, where the cost of care and the attendant risk is spread out over large numbers of people. For small employers, though, one accident or major illness can push expenses far above the expected level. Still, with premiums for traditional policies continuing to rise, small businesses are increasingly ready to roll the dice. Some 20 percent of companies with 50 to 199 workers self-insured in 2010, up from 14 percent four years earlier, according to a Rand Corp. analysis commissioned by the U.S. Department of Labor.

Self-insured plans are governed by federal law and not states, which typically oversee fully insurance plans. Some regulators fear that insurers attempting to avoid state taxes on insurance premiums and skirt state laws requiring minimum benefit levels will offer plans that are self-insurance in name only. One way they can do that is with stop-loss policies that start paying out at very low levels, after as little as $10,000 in claims, which sharply reduces the risk companies face. If “the employer is not in fact bearing the risk and the insurance company is, then the Division of Insurance may take a closer look,”  Some states already prohibit self insuring for plans with fewer than 50 participants, others are considering tighter restrictions on self insuring for small employers.

Self-insuring appeals to employers because dollars not spent on medical care stay in the company instead of flowing to the insurance carrier’s bottom line. The approach also gives businesses more detailed information about how their workers use health care. Claims data, which insurers are often reluctant to share, can help companies tailor plans and wellness programs to improve workers’ health by helping them quit smoking or lose weight. Employers have also been able to provide less generous plans as many states have coverage mandates for fully insured plans that self insured plans are not required to provide, thus lowering cost in some cases.

Negotiating stop loss insurance after a year of heavy losses (and it happens frequently) can be very difficult and the resulting stop loss insurance premium can double, triple or not be available at all. Insurers offering stop-loss policies sometimes protect themselves with what the industry calls “lasering.” That’s when they raise the dollar amount the employer must pay before stop-loss kicks in for certain workers deemed to be high-risk—which can shift even more cost to employers. The practice can be “devastating” to small businesses. Employers pay more up front for guarantees that they won’t have sick workers carved out later on, but  small businesses should insist on that protection to avoid being overwhelmed by catastrophic claims. “A premature baby who has a lot of health issues could be a million-dollar claim in a single year, that could be twice as much as [small companies] pay in health premiums altogether.”

Benefits from self-insurance don’t materialize overnight, you need to be an engaged employer and it’s not a one-year savings.  Small companies drawn by the promise of lower costs may not fully grasp the risk involve, there are a lot of brokers out there that recommend self-funding to employers, it’s really, really important that you understand what you’re getting into.