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If you run a smaller firm and pay an insurance company to cover your workers’ health, one of your top concerns is probably how to control spiraling health insurance expenses.
Just two or three major health expenditures can cause your insurer to radically increase your premiums.
And if you’re located in a part of the country with a shortage of competing insurance companies, that’s an increase you just can’t escape.
One employer told me his insurer would only sign a contract if they reserved the right to raise rates on a monthly basis, rather than on a yearly basis.
Flattening the Cost Curve
A lot of small firms are not aware that there may be a way to break insurers’ grip on their bottom line: Self-funding their health benefit.
Self-insured companies do not purchase conventional insurance; instead, they pay their employees’ claims directly, usually through the services of a third-party administrator, with stop-loss insurance in place to cover abnormal risks.
Self-funded health care was once considered only by large employers. But in the current climate, mid-sized and smaller companies are comparing the investment and risk of self-funding to remaining fully insured, and self funding comes out on top. There are three major reasons for this.
- Health care reform piled new coverage mandates on insurers (care for dependents, no pre-existing condition exclusions, annual and lifetime limits eliminated) and the insurers will pass those costs on to employers and individual policyholders.
- The cost of health services has been skyrocketing at double the rate of inflation for 12 consecutive years.
- Self-funded plans are free of broker fees, which are paid year after year.
Self-funding health benefits can lower companies’ costs by avoiding state mandates and premium taxes. Self-insuring also gives employers greater control over benefit design, allowing them to respond to employee demographics, conditions, wants and needs.
Why then, isn’t everyone self-funding? The answer is the risk of a catastrophic health event (or combination thereof) that would bankrupt the fund. There’s the complexity of setting up and managing a plan. And legal responsibilities come with managing a self-funded plan. It requires a commitment and resources. It requires a far higher compliance burden and exposure to risk than full insurance. But it can be an escape hatch from the insurers’ cost spiral.
Though self-funding is not widespread among small groups, it has grown, with 12 percent of small company (3-199 workers) health plan sponsors in self-insured plans in 2009, up from 6 percent earlier in the decade.
In order to start self-funding, you’ll need someone in your organization who: understands funding issues; knows how to assess whether provider prices are reasonable; can review decisions about whether an employee’s experimental or perhaps even exotic treatments should be allowed or denied.
Returns on investment from self-funding often do not appear until after year 1. But while savings are not guaranteed in the first year, it is reasonable to expect lower costs, more control over plan design and more employee engagement for years afterward.
Additional advice about sponsoring a self-funded plan is available in Thompson Publishing Group’s Employer’s Guide to Self-Insuring Health Benefits, comprising 18 years of detailed observation and analysis of self-funding experiences and trends. It has been extensively updated with information to help plan sponsors cope with health reform.