In recent years, employers looking for ways to avoid many of the regulations and requirements related to employee health benefits have turned to self-insurance. For the most part, these were large or midsize organizations that were likely to have enough cash flow to meet the financial commitments associated with self-insurance.
Smaller employers had historically avoided self-insured health plans out of concerns that their cash flow and risk tolerance would be a poor fit for self-funded coverage. Then the Affordable Care Act (ACA) put in place a range of plan design and coverage obligations for employer plans but exempted self-insured plans from many of these requirements. As a result, smaller employers began considering how they, too, could shift their health plans to a self-insured model.
Data from the nonprofit Employee Benefits Research Institute (EBRI) in Washington, D.C., found that self-insurance increased between 2011 and 2015:
- Among employers with fewer than 100 employees, from 11.9 percent to 14.2 percent.
- Among employers with 100 to 499 employees, from 25.3 percent to 30.1 percent.
According to the Self-Insurance Institute of America, a trade group in Washington, D.C., a self-insured group plan (also known as a self-funded plan) is one in which the employer assumes the financial risk for providing health care benefits to its employees.
As opposed to fully insured employers, self-insured employers typically will:
- Pay for employees' out-of-pocket claims as they are incurred.
- Set up a trust fund to earmark money (from corporate and employee premium contributions) to pay incurred claims.
- Hire a third-party administrator (TPA), such as a commercial insurance provider, to administer claims. TPAs can also help employers set up their self-insured plans and coordinate provider network contracts.
- Purchase stop-loss insurance that kicks in once claims reach a specific dollar threshold, to protect against unpredicted or catastrophic claims.
More than the ACA
The Republican Congress is now moving to "repeal and replace" the ACA, although the timetable for doing so and the scope of the eventual replacement plan remain uncertain.
"ACA exemptions made self-insurance much more attractive, so it is unclear what is going to happen," said Robert Pozen, senior lecturer at the Sloan School of Management at the Massachusetts Institute of Technology in Cambridge, Mass.
Regardless of the ACA's future, proponents argue that self-insured plans offer employers compelling opportunities beyond avoiding ACA compliance. While the ACA has been a key driver of the growth in self-insured health benefits, "many smaller employers are looking for a different approach to health coverage," said Michael Schroeder, president of Roundstone Management Ltd. in Cleveland. "Self-insurance can help them address limitations in underwriting and pricing, provide more control over plan design, and avoid taxes that can total 3 to 4 percent."
Schroeder noted, for example, that because self-insurance allows employers greater access to aggregate claims data, these organizations can see what is driving cost increases and adjust plan design or target wellness initiatives to contain costs in any problem areas, such as workforce obesity.
"With a fully insured plan, employers find out the total cost increase during annual renewal but receive no information that is specific to their organization" to see how their costs compare to their peers, he said.
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The key issue for smaller employers when it comes to self-insurance is the size of the covered population and ensuring that these organizations have the resources to pay for unexpectedly large claims.
"Self-insurance makes the most sense for companies with a healthy employee population," said Pozen. "But most companies do not have a workforce made up of 25-year-olds. And you never know when someone could have a costly illness or medical condition."
Risk management tips include the following:
- Know your individual state's rules. Although stop-loss insurance coverage is commonly used by self-insured organizations, employers need to be careful when choosing a policy and to heed state requirements for this coverage.
California, for instance, requires self-insured employers to have at least 50 employees and carry stop-loss coverage with a minimum deductible of $40,000. The intent is to prevent employers from buying stop-loss coverage with a deductible so low that the health plan resembles traditional insurance coverage while the employer avoids many of the requirements that the state places on fully insured plans.
- Mind the contract's fine print. "It is important to understand the terms and conditions for stop-loss coverage," said Pozen. Smaller employers tend to be low margin customers for these carriers. If there is a large claim, the insurer could terminate the coverage or refuse to renew the policy. "It is pretty predictable that an insurance company will want to get out of a policy that has experienced a large loss," he said.
If that happens, the employer may have as little as three months' notice of nonrenewal and may not be able to replace that coverage easily—or at all.
Even if the employer is able to find new stop-loss coverage, the cost could be prohibitively expensive. For that reason, it's important to work with a broker who understands the stop-loss market, said Pozen.
- Join with other employers. Schroeder said smaller employers can address concerns about stop-loss coverage and risk management by forming or joining a stop-loss captive that collects premiums from, and pools the risk among, a group of like-minded employers. A captive "allows employers to share these risks with other employers and spread risk in a larger group," he said.
- Choose an appropriate TPA. Contracting with a TPA with experience in the small employer market is also important. "TPAs that work with larger companies may not be as flexible and transparent," Schroeder said.
To help smaller employers find a TPA that is able to meet their needs, he advised asking a prospective TPA questions about the average size of its self-insured customers and then delving down into matters such as:
- Customer service.
- Access to provider networks.
- Enrollment processes.
- Claims management and other technology.
Joanne Sammer is a freelance writer based in New Jersey.
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