The Alternative to Buying Small Business Health Insurance
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Most small-business owners don’t realize there is an alternative to traditional health insurance. It’s called “self-funded” health care and it allows businesses to pay employees’ health insurance claims rather than pay an insurance premium for services their employees may never use.
Self-funded health insurance can be managed for business owners by a third-party administrator (TPA). Joe Berardo, the president and CEO of MagnaCare, one such TPA, tells BusinessNewsDaily why small-business owners should consider making the switch.
BusinessNewsDaily: Can you explain what self-funded health care is?
Joe Berardo: Self-funding enables employers to pay their own claims rather than buying traditional health insurance. Employers usually delegate administrative responsibilities to a TPA, insurer or HMO. They can manage exposure to catastrophic claims by purchasing excess stop-loss insurance. Employers create more predictability by purchasing stop-loss insurance coverage, which protects the entire covered group and reduces exposure to losses resulting from catastrophic and high-dollar claims. When claims come in a lot higher than expected, the stop- loss kicks in. Employers are only exposed to claims up to a certain point -- and can stop worrying about every claim that lands on their desk.
BND: What are the advantages of self-funded health care?
JB: Self-funding ends the frustration of excessive costs by giving small businesses more control of their plan’s administration and funding levels. It’s likely that some employers can save from 15-25 percent in the first year of self-funding and as much as 30-40 percent over time.
In addition:
- It is not subject to conflicting state health insurance regulations/benefit mandates, as self-insured health plans are regulated under federal law (ERISA).
- It is not subject to state health insurance premium taxes, which are generally two to three percent of the premium's dollar value.
- Companies can gain control over insurance programs, and thereby improve cash flow and maintain company health plan reserves for investment.
- It reduces plan-operating costs.
- Accessible claims reporting packages are available.
- It creates a health benefit plan that meets the needs of the work force, which attracts and retains employees.
- Most self-funded companies can mitigate risk and lower administrative costs by working with a health plan management firm.
BND: Why is there a misconception that self-funded health care is only an option for large companies?
JB: Small employers are rarely presented with the facts about self-funding because many insurance agents have not taken the time to fully understand the plan’s benefits themselves. Contrary to public perception, the biggest growth in self-funding has been among the smallest employers -- or those overlooked or exploited by insurance companies in the past.
BND: What are the biggest problems facing small businesses in terms of health care?
JB: Small businesses that are fully insured will continue to deal with hefty increases in premiums year after year and the potential for more government regulations. This forces them to choose between paying the higher premiums or reducing benefits for their employees.
BND: What are the risks of using self-funded health care?
JB: There’s no guarantee of what a self-funded plan will cost. Employers take the risk for all claims, which can fluctuate from month-to-month or even week-to-week, and assume the responsibility for paying them. To offset these costs, employers can purchase stop-loss insurance, which provides a cap on how much a small business must pay on claims.
BND: Have more companies turned to self-funding since insurance rates have continued to go up?
JB: Yes. In fact, it’s currently estimated that 57 percent of all health plans are self-funded covering more than 100 million Americans (The Kaiser Family Foundation: Employer Health Benefits – 2009 Survey).
BND: Can an employer go from self-funded to fully insured health care and if so, what are the consequences?
JB: Companies may switch between fully insured and self-funded plans; however, some providers or physicians could fall out-of-network. But this occurs even when companies switch between fully insured plans. By having more control, small businesses may adjust plans and stop-loss rates can be negotiated without affecting the members’ providers.
BND: How has health care reform affected the "self-funding" business model?
JB: Details of the recent health care legislation have yet to be ironed out; however, small businesses should familiarize themselves with potential changes and develop compliance strategies in advance of burdensome regulations that appear to be around the corner.