Healthcare Reform: Self-Funding Pros and Cons
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When San Jose, Calif.-based Bay Microsystems faced a 9 percent price increase on the health plan it provided for its 31 employees in 2012, human-resources manager Claudia Amendt didn’t go shopping around for a cheaper plan. Instead the company, which has provided health coverage for most of its 14-year history, switched to self-insurance and opted to pay the healthcare costs of all its employees directly, rather than offloading that risk to a traditional managed-care plan. As a result, Amendt says, Bay’s health-insurance premiums actually decreased by 10 percent. “Insurance is one of those costs that just keeps going up and up,” Amendt says. “At some point, you have to get creative.”
The July 2 revelation that companies with over 50 full-time employees would have an extra year to comply with the Affordable Care Act, otherwise known as Obamacare, was welcome news to small business owners, but as the law comes into full force in 2015, no doubt many more small companies will consider taking their health coverage in-house. Self-insuring, traditionally most popular with companies of 5,000 or more employees, is moving down market, as small companies face the prospect of their costs increasing under health reform. According to Kaiser Family Foundation, 15 percent of covered employees working for firms with fewer than 200 employees were covered by self-insured plans in 2012, up from 10 percent in 2004.
Self-insured plans will be exempt from some of the more pricey requirements under the ACA, such as the need to provide mental-health benefits, and to adhere to pricing rules that will cause the costs of insuring younger workers to rise. Most self-insured policies are not subject to state insurance mandates, so the same plan can be offered to employees in different states. Demand for self-insurance is so strong that UnitedHealthcare began offering the option to companies with as few as 10 employees this year. The previous cut-off was 100 employees, according to an e-mail from a UnitedHealthcare spokesperson.
Self-insurance is also referred to as “self-funded” insurance, but either way, it’s a bit of a misnomer. Even if you choose to self-fund your health plan, day-to-day administrative tasks such as collecting co-pays and premiums, and paying claims, will be handled by a benefits provider or an insurer such as United or Cigna. And you won’t truly be taking on 100 percent of the risk, because self-funded plans for small companies are sold alongside “stop-loss” insurance policies, which protect them against large claims from unexpected events such as car accidents or cancer diagnoses.
So how do you decide whether self-insurance is a good option for your company? If your workforce is made up of healthy twenty-somethings, you might assume your risk will be minimal, but that wouldn’t be smart, says Samuel Fleet, president of AmWINS Group Benefits in Warwick, R.I. He recommends that all small companies distribute health-risk assessment forms—questionnaires that ask employees to report (anonymously) their health histories, family patterns of disease, and lifestyle choices such as smoking. “Then you can hand that to a third-party underwriter and ask, ‘Does it make sense for me to consider self-insurance?’” Fleet says.
Julie McCarter, vice president of product for Cigna's Select Segment, which serves small companies, says understanding your risk is only the first step. When you self-insure, you receive all the information about how your employees are using the benefits, what claims they’re making, and other information that you’ll need to manage the plan going forward. You’ll also be taking on some legal risk: If, for example, an employee files a lawsuit over a denied claim, your company will have to pay the legal fees to defend that, as well as any reimbursement that results from the decision. “Small employers in the U.S. have a pretty high turnover rate, about a third a year, so the [current] makeup of the workforce should not be a leading indicator as to whether you should self-fund your plan,” McCarter says. “You have to be willing to take on the responsibility of being more engaged with your health plan.”
One advantage of self-funding your health plan is you can use that health-risk information you gather to tailor wellness programs which in turn could lower your future costs by decreasing your risk. “If you have 75 employees and 25 smoke, you can put in a smoking-cessation program,” says Timothy Finnell, president of Group Benefits in Memphis, Tenn. “Most fully insured plans don’t provide as much flexibility to customize wellness programs.”
Insurers such as Cigna have been adding options to make self-insurance more attractive to small employers, such as bundling the service with affordable stop-loss insurance, and assistance designing and promoting wellness programs.
That said, self-insurance isn’t something you should dabble in for a short time. Finnell tells his clients they can expect to save between 4 and 10 percent over five years by switching to self-insurance, provided they can stomach the occasional spate of high claims and they’re willing to get serious about keeping their workforce healthy. “It will pay off, but you can have down years, and it’s troublesome when that happens in the first year,” he says. “You have to understand that self-funding is a long-term commitment.”