Self-Insurance 101

Self-insured may sound like a contradiction in terms—after all, isn’t the point of insurance to have the financial backing of a major carrier to cover medical expenses? But in reality, self-insured plans can provide all the protection of a fully insured plan while delivering cost efficiencies to employers that those plans cannot.

More companies than you may realize have self-insured their group health plans for years. As healthcare costs have continued to rise over the last few decades, more and more companies are considering self-funded plans as a way to save on annual premiums. It is estimated that, as of 2015, 63 percent of overall employers were fully or partially self-insured, compared to 44 percent in 1999, according to Managed Care Magazine. (That number is higher for employers with more than 5,000 employees, 94 percent of whom were fully or partially self-insured.)

So how exactly does it work?

Self-insured essentially means that business owners pay for each employee claim out of pocket, as they occur, as opposed to paying monthly premiums to an insurance carrier. Claims are paid for with cash sourced from employee payroll deductions and employer matching as usual; however, these funds are usually held in a dedicated claims reserve account, which enables businesses to not only save on state premium taxes, but to keep any funding reserves that are not paid out for medical claims, which often add up to 12% or more in annual savings, and, which would otherwise be paid to the fully-insured carrier.

Before we go further, let’s dispel a few myths.

Self-insured is not only for large corporations.

Many small and midsize companies utilize self-insured plans as a way of cutting their overhead and maintaining control over their healthcare costs.

Self-insured does not result in gaps in coverage.

In fact, it is just the opposite; it is tailored to the specific needs of your employees, as those needs arise.

Self-insured does not mean that you end up on the hook for catastrophic claims.

Most employers, particularly small and midsize companies who use self-insured plans also utilize a medical stop-loss policy to cover excess claims so that the company can forecast and manage cash flow just as they would under a fully-insured health plan.

How do you decide if it’s right for your business?

Most business owners need to start by reframing the way they view their benefits. Especially as the healthcare debate rollercoaster continues in the legislature, many could be wary of rocking the boat. The thing to remember, though, is that self-insuring actually lightens the burden placed on businesses by uncertainty or changes in legislation. While all self-insured and supplemental plans are still beholden to many federal regulations (HIPAA, ERISA, COBRA, etc.,), they are not subject to many of the regulations that govern fully insured plans, giving employers more flexibility to customize their plan offerings and to provide a single plan across state lines.

As the business owner, begin by considering the makeup of your employees. Does your employee population trend towards Millennials and young and healthy Gen Xers, who may be more focused on family planning, or Baby Boomers, more likely to need care for the types of chronic conditions that begin to crop up in one’s fifties and sixties? This analysis enables you to anticipate coverage needs and potential risks when deciding whether or not to self-insure, keeping in mind that with self-insured plans you are able to design the benefits that most effectively meet the unique needs of your employee population.

How do claims get processed and paid?

Processing claims is a complex undertaking which is why most self-insured companies contract this function to a third party administrator (TPA), which can offer the same level of ease as simply writing your monthly premium check. These companies take on the logistical work of processing claims and serving as the liaison between the employee and the provider, on the front lines of customer service.

TPAs help their clients stay on top of changes in rates, update employee data and healthcare requirements, work with carriers to assess risk and ultimately provide greater cost savings overall. TPAs also help their clients analyze their own claims data yielding greater insight into how to manage benefits and save more money, which for most small and midsized organizations is typically hidden from view within the fully-insured carrier.

The only certainty about healthcare these days seems to be that it’s expensive, so considering alternative options to the standard fully insured healthplan can make a significant difference in your business’ bottom line and offer more security in your ability to offer competitive benefits. Self-insuring can give you back the control you want without complicating your operations.

Have questions about whether self-insured is right for your organization – or just questions about self-insured in general? Contact us today for a free, no-obligation consultation. We’re happy to answer your questions.