By Nicos Mamatos —
Frustrated by the escalating cost of employee health insurance, small and midsize employers increasingly are turning to self-insurance.
Employers that self-fund their employees’ health benefits save money by avoiding state premium taxes assessed on insured benefit plans, which shaves 1.5% to 3% off their annual cost. An additional 3% to 5% savings comes from the elimination of insurer risk charges and profit margins.
And because self-insured benefits plans are federally regulated by the Employee Retirement Income Security Act (ERISA), they are exempt from state benefit mandates, which further drive up the cost of insured plans. Self-funding also maximizes cash flow since employers pay claims as they are incurred.
Employers that self-fund also save money on broker commissions. Instead of paying a percentage of premiums to their brokers in the form of commissions, they pay them a set consulting fee, which is typically lower.
Fully insured plans, on the other hand, charge employers a set monthly premium based on their group’s demographics and other factors such as geography, even if there are no claims. And if large-scale claims do occur, the insurer will increase premiums in subsequent years to cover those costs.
Self-funding Adds Flexibility, Transparency
Another benefit of self-funding is that it gives employers more control over plan design. Although self-insured employers are still subject to the essential benefit requirements of the Affordable Care Act, such as covering 100% of most preventive care services, ERISA enables self-funded employers to tailor their benefits to meet the needs and wants of their employees.
Self-insured employers also have access to their own claims data, which helps them make informed decisions about where to direct wellness and cost-containment programs. For example, one employer may have a lot of employees using infertility treatment, so it may decide to offer a best-in-class infertility program to reduce those expenses. Another employer with a large proportion of joint replacement claims may offer incentives to use physical therapy or other lower-cost alternatives.
The Downside of Self-insurance
While there are many advantages to self-funding, it also has some disadvantages:
- Since self-funded employers assume all financial risk for providing health care benefits to their employees, they must have sufficient cash on hand to pay claims as they come in. Typically, a self-insured employer will set up a special trust fund to earmark money (both corporate and employee contributions) to pay incurred claims.
- Self-funding can expose employers to potentially catastrophic claims. To reduce this risk, employers can buy medical stop-loss insurance, which pays claims above a certain threshold. For example, a specific stop-loss policy would cover claims for an individual over $25,000, while an aggregate stop-loss coverage would apply when claims for the entire group exceed a set percentage of projected claims, typically 125% of projected claims.
- Self-insured employers also pay fees to third-party administrators (TPA) to process and pay claims and to access discounted provider networks. In addition to independent TPAs, most insurers also offer TPA services for a fee under Administrative Services Only (ASO) contracts.
Self-funding Becoming Popular with Smaller Firms
Historically, self-insurance has been popular among large employers. The vast majority—86%–of employers with 1,000 or more employees self-insure their health benefits. But interest in self-funding is growing among smaller employers, and now more than half—58%–of companies with 200 or more employees self-fund their benefit plans, according to the 2019 Employer Health Benefits Survey published by the Kaiser Family Foundation.
The availability of attractively priced stop-loss insurance at lower attachment points also is making it easier for smaller firms to self-fund. According to the KFF survey, 17% of firms with 3-199 employees now self-insure their health benefit plans.
Weigh Risks and Rewards before Self-funding Benefits
Despite its growing popularity, self-funding may not be the solution for every employer. Among other things, they should consider whether they have the necessary cash on hand, their tolerance for taking on their employees’ health care risks and whether they really want more control over the design of their benefit plan. A trusted advisor with experience in both fully insured and self-insured benefits can help guide employers contemplating self-funding through the decision-making process by conducting a thorough risk- and cost-benefit analysis.