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INSIGHTS
EMPLOYEE BENEFITS
Creative funding strategies
Part 3: Should your company consider
a self-insured health care plan?
A
lmost every employer that offers
a group health benefit program is
searching for methods to lower their
company’s spending.
There are several ways to cut health
insurance spending that are probably
familiar, such as modifying plan designs,
changing insurance companies and shifting
more costs to employees. What many
employers don’t consider is shifting from
offering an insured health plan to selfinsurance, says Aaron Ochs, consultant and
project manager at JRG Advisors.
“The market is rapidly changing. Because
of the effects of the Accountable Care Act
and ever escalating costs, self-insurance —
normally considered a funding method only
available to large employers — is becoming
a viable option for employers as small as 25
employees or less,” Ochs says.
Smart Business spoke with Ochs about who
should consider getting a self-insured plan.
How does self-funding work?
As the term implies, in a self-insured, or selffunded, health plan, the employer takes on
direct financial responsibility for employees’
health care costs. Rather than being pooled
into a larger risk pool, the self-funding
employer takes on the risk for its own
employee group.
Some customization can be applied to the
structure of these contracts. For example,
all of a health plan may be self-funded, or a
contract might be purchased to cover certain
types of claims. Most self-funded employers
buy stop-loss insurance to cover catastrophic
claims, capping the financial risk exposure.
Self-insured health plans are exempt from
most state insurance laws and mandates, and
not having to pay regular premiums to an
insurance company can result in substantial
savings. An employer also only pays for the
AARON OCHS
Consultant, project manager
JRG Advisors
(412) 456-7237
[email protected]
WEBINAR: For more information on our upcoming
webinar series on Creative Funding Strategies, visit
www.jrgadvisors.net.
Insights Employee Benefits is brought to you by JRG Advisors
claims that actually occur, not the claims an
insurance company projects may occur.
Despite these advantages, many employers,
especially smaller ones, tend to avoid
self-funding — perceiving it as too risky.
According to a recent Kaiser Foundation
survey, among employers with 200 or
more workers, 82 percent of employees are
self-insured. Conversely, only 13 percent
of employees in firms with three to 199
employees are in a self-insured plan.
What do employers need to know before
starting a self-insured plan?
Self-insurance is not the right approach
for every employer. Some companies will
benefit from such an arrangement, others
will not. An employer should consider that:
■ Self-funding can provide more control
over your health plan. Coverage can be
customized since you are not purchasing
a pre-packaged product. Self-insured
plans are subject to ERISA but aren’t
bound by state insurance laws and state
coverage requirements. You can truly
meet employee health care needs with a
plan that makes sense.
■ A self-insured company pays health
claims as they incur, rather than paying
a monthly premium regardless of actual
claims activity. This can be attractive,
especially during periods where health
claims are low. On the other hand, the
reverse is also true in that you will have
to handle large claims as they come
in. Remember, however, that stop-loss
insurance limits this exposure and there
are other methods to minimize payment
swings, such as level funding.
■ When you pay a premium to an insurance
company, you pay for more than just
claims. The premium takes into account
the insurer’s overhead costs, including
advertising, technology, legal, etc., some
allowance against their own financial
risk and a profit margin. Self-insured
employers don’t have to pay these hidden
costs, but they do incur other expenses
like third-party administration of claims
and the premium for stop-loss insurance.
In addition, workforce demographics can
make a self-insured solution either more or
less attractive. Young and healthy employees
do not necessarily guarantee a less expensive
self-insured solution. Nor will older and
unhealthy employees always break the bank.
Always remember that self-funding means
your company bears the risk associated with
your employees, along with the protection
of a stop-loss carrier.
It’s worth closely analyzing this risk with a
professional who can give you well thought
out estimates of your company’s potential
liability. Only then will you be able to
intelligently decide whether self-insurance is
for you. ●
© 2015 Smart Business Network Inc. Reprinted from the July 2015 issue of Smart Business Pittsburgh.