SEPTEMBER 02, 2016As open enrollment for health insurance approaches later this year—and some insurers plan to leave the Affordable Care Act marketplaces

—providing employees with health insurance is becoming increasingly complicated.“The group health plan marketplace for smaller and mid-sized employers has become more unstable and expensive due to general uncertainties about the future of health care reform and the lack of competition among traditional insurance companies,” notes Michael Ferguson, president & CEO of the Self-Insurance Institute of America, Inc.

(SIIA). The result of this uncertainty is that some businesses are considering and adopting self-insurance.

“In recent years, traditional health insurance sources have been drying up, particularly for small businesses with 50 or fewer employees,” says Ernie Clevenger, president of CareHere LLC

, a company that self-insures for medical insurance.“With some insurance companies reviewing or pulling out of exchanges, the supply of health insurance is decreasing. Meanwhile, demand for health insurance is increasing, particularly as the Affordable Care Act’s penalties for businesses that fail to provide insurance increase,” says Clevenger. “With supply down and demand up, the price of conventional insurance is rising. Consequently, many small businesses are exploring alternative benefit arrangements, including self-insurance, that allow them to provide high-quality benefits and avoid the volatility in the conventional insurance market.”

Kate Amdor is manager, compensation and benefits for Telligen, Inc.

, which also self-insures. “The traditional health insurance approach for small-business owners is to work with a broker to develop a financial plan, which is typically a fully-insured product,” she says. “Unfortunately, like with most insurance products, business owners find they eventually pay more than their expected losses.”Facing what Amdor believes to be double-digit premium hikes year after year and increasing related fees that threaten profits, many small-business owners are increasingly considering self-funding their health plans, backed by stop-loss insurance for large claims. “It’s a calculated risk, but done the right way, self-funding a health plan with stop-loss coverage typically costs less than fully-insuring the plan, over time,” says Amdor.

How Common Is Self-Insuring?

Self-insuring is not new and more popular than might be expected. According to The Kaiser Family Foundation/Health Research & Educational Trust 2015 Annual Employer Health Benefits Survey (Kaiser/HRET)

from a telephone survey of 1,997 randomly selected public and private employers with three or more workers, 17 percent of workers with insurance at small firms are enrolled in plans that are partially or completely self-funded. Overall, 63 percent of workers are enrolled in self-funded plans. Of those 63 percent, 60 percent also have what is known as stop-loss coverage, which is additional insurance in the case of high claims.

What Are the Benefits of Self-Insuring?

According to those companies that have gone the self-insurance route, there are a variety of good reasons to self-insure.

“The three main benefits of self-insurance involve cost, control and access to data,” says Ferguson. “Well-run self-insured group health plans are generally more cost-effective over time when compared to traditional insurance arrangements, although year-to-year experience often varies. Employers that self-insure also maintain control of how their health plan is structured, which contrasts with standardized plans sold by insurance companies. Self-insured employers are also able to access their own claims data, subject to certain HIPAA restrictions, which allows for greater efficiency in plan management.”

Self-insurance may also allow companies to provide more comprehensive and customized benefits for their employees designed to increase overall health, which can save money in the long run.

“Because employers are directly responsible for the cost of their employees’ care, they have a significant incentive to invest in their employees’ health,” says Clevenger. He notes that employers are increasingly offering employees innovative options for receiving care, like free medical center clinics within the workplace and access to data analytics software that identifies potentially costly health risks so that early intervention is possible.

“Providing services that allow employees to truly improve their health is an ideal way for small-business owners to decrease healthcare costs in the long-run,” agrees Amdor. “Good claims years when claims expenses run lower than expected allow the business owner to create reserves for the tougher years.”

What Are the Drawbacks of Self-Insuring?

There are, of course, cons to self-insuring, and self-insurance isn’t for every business, believes Ferguson. “Clearly, one of the main considerations is understanding that when you are self-insured, you’re on the hook to pay claims as they are incurred. Some of these claims may be large. Even though most employers purchase stop-loss insurance as a financial backstop, employers need to understand this obligation.”

Business owners new to self-funding must have the “stomach for the years in which the health claims they pay are higher than expected,” says Amdor. “If they haven’t yet built up good reserves, claims expenses may affect their financial performance.”

Clevenger agrees. “The biggest possible con of self-funding is that it requires businesses to have an understanding of the risk they’re taking on. By self-funding, firms assume responsibility for the financing of their employees’ health care. They must take that responsibility seriously.”

There is also a substantial time commitment involved in reviewing and analyzing plan performance. “The best-run self-insured health plans are monitored by the company’s executive team,” says Ferguson. “Self-insurance should not be seen as a simple, one-time business decision that can be ignored later on.”

How Can You Successfully Self-Insure?

In order to decide if self-insuring is right for your business, Clevenger suggests conducting a side-by-side comparison of the annual cost of a fully insured plan with the annual cost of a self-funded plan and then projecting that comparison five years out into the future. Third-party administrators, including health benefit brokers or consultants, can run models to project costs under a self-funding arrangement versus your current fully insured plan.

If you’re interested in self-insurance, seek out knowledgeable brokers, consultants and/or third party administrators who can thoroughly evaluate this option. “Confirm that such advisors have successful experience with self-insured plans,” advises Ferguson, who notes that a listing of advisors can be found on www.siia.org

.Read more articles on healthcare.

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