Open enrollment for 2016 benefits is coming to an end, and many businesses and workers are finding themselves with higher insurance costs than ever before. Many small businesses that offer health insurance plans may think that purchasing an expensive plan from an insurance carrier is their only option. But depending on your circumstances, self-insurance could help you save a significant amount of money on your premiums.
What is self-insurance?
According to Healthcare.gov, self-insurance is a "type of plan ... where the employer itself collects premiums from enrollees and takes on the responsibility of paying employees' and dependents' medical claims." Insurance services such as enrollment, claims processing and provider networks can be handled in-house, but are more frequently managed by a third-party administrator (TPA) or an insurance company. [Open Enrollment: What Small Businesses Need to Consider]
With self-insurance, the employer takes on much of the risk that insurance carriers typically assume. In an article on ZaneBenefits.com, author Christina Merhar outlines the difference between fully insured and self-insured health plans:
- Fully insured (traditional) plans involve a fixed monthly premium paid to an insurance carrier, based on the number of employees enrolled in the plan. The carrier pays for health care claims, while enrolled employees and dependents pay any deductible amounts or co-payments for those covered services.
- Self-insured (self-funded) plans involve fixed monthly costs such as administrative fees based on plan enrollment. Health care claims are paid by the employer, and costs vary from month to month, based on the services used by enrolled employees and dependents.
Because of the increased liability associated with self-insurance, employers have a couple of options to reduce their risk and potential costs under this type of plan. You can set up a health care reimbursement plan (HRP), in which the employer reimburses employees for individual eligible health insurance premiums.
You can also purchase a stop-loss insurance policy, in which an insurance carrier is responsible for "unpredictable" losses that exceed your deductible limits, according to HCC.com. This policy helps employers who choose the "hybrid" option of a level-funded plan, in which part of the insurance premium (approximately 40 percent) is set aside into a fund specifically for claims coverage. Stop-gap insurance kicks in once that fund is used up, but any unused funds will be returned to the busines, said Russ Carpel, CEO of Level Funded Health, a provider of self-insurance programs.
Self-insurance and the Affordable Care Act
Prior to the Affordable Care Act (ACA), self-funding employee benefits was considered too risky and complex for most small businesses, Carpel said. Although the concept has been around for years, self-insurance has traditionally been an option that only larger companies (those with 1,000 employees or more) and unions took advantage of. But the ACA's "adjusted community rating" requirement has led to higher premiums across the board for traditional insurance, and small businesses are finding that self-insurance could save them money.
"Underwriters used to look at medical data and price premiums accordingly, [based on] the actual risk profile of a particular group of employees," Carpel said. "Now it's an adjusted community-rating risk, spread out more broadly across hundreds of businesses in a certain community, [and] carriers are not allowed to look at medical data ... [beyond] age, zip code and tobacco usage. That's why small businesses are seeing 20 to 200 percent increases in premiums."
But because of the Employee Retirement Income Security Act (ERISA) of 1974, this rating methodology doesn't apply if your insurance plan is self-funded. Your rates can be based on your specific group, rather than on multiple groups in your local area.
"Under ERISA, if a group is fairly healthy with no critical illnesses ... you would save 10 to 40 percent just by letting underwriters get a deeper look at medical data," Carpel told Business News Daily.
Self-insured plans are also exempt from the excise tax on health insurance premiums under the ACA.
Factors to consider
Is self-insurance right for your business? Before you make the switch, it's important to take the time to conduct thorough research on risk projections, potential discounts and cost comparisons.
"Before self-insuring, an employer needs a feasibility study using its claims experience and projections," said insurance professional Michael Turpin in an interview with BenefitsPro. "An employer also needs to review provider network discounts to ascertain the subtle differences between each insurer-based network, as well as independent, third-party, administrator-based networks. Employers also need to understand the nuances of provider contracting."
Turpin also noted that very small employers (those with fewer than 100 employees) may still be too small to accurately predict their risk. Therefore, one major unexpected claim could put a huge wrench in your budget. However, it still might be a smart, cost-cutting option if your workforce has been historically healthy.
"It's [unfortunate] to see small businesses get penalized by the government and big business," Carpel said. "Most companies are paying 50 percent of employees' premiums, so [self-insurance savings] don't just benefit the business, but also the average Joe."