Doing it yourself: Should you self-insure your group health insurance?

John Morell

self-insure group health insuranceYour company might manufacture counter tops, or perhaps you just bought your third family entertainment center.

But did you know you could also become an insurer?

As your company hopefully) grows, you'll find that your health insurance choices will increase as well, and these will include the option of self-insuring.

Self-insurance, also known as self-funding, is basically putting your company in the role of the insurer. Employees pay premiums into a trust account rather than to an insurance company and when someone has a claim, it's paid out from the trust.

If there are unexpectedly large claims that deplete the account or if the business should unexpectedly close up shop, a stop-loss insurance policy is usually in place to make sure everyone's covered.

So if the trust fund for claims falls below a certain amount because of unanticipated health problems in the employee group, stop-loss insurance kicks in to cover the expenses.

Why self-insurance?

The advantage for an employer is that rather than being at the whim of an insurer that raises rates annually, he or she can keep health benefit costs on an even keel because of less overhead than a big insurance company.

The downside? Self-insurance isn't like signing a check to Blue Cross and going back to work. As the employer and health insurer combined, you are taking on a great deal of responsibility, and you must make sure your company can handle it.

According to the Self Insurance Institute of America, about 33 percent of employees and their families in the U.S. receive health benefits through some form of self-insurance, whether the program uses a stop-loss insurance backstop, which is known as a partially self-funded plan or if it's big enough to operate on its own.

"When you have a large company, it becomes very advantageous," says Helen Darling, president of the National Business Group on Health, a nonprofit organization assisting the health care interests of large businesses and organizations in Washington, D.C. "I once worked for a corporation with 120,000 employees and for us, self-insurance made perfect sense."

Here are four guidelines to determine if self-insurance is right for your company.

1. Size matters.

The larger your employee pool, the better off you'll be regarding rates as statistically, the larger the pool, the healthier the majority of that pool will be. They will also contribute more money to the trust.

"With just 50 employees, it gets trickier. Much is going to depend on the health of your group if you're small," says Craig Lack, president of Premium Reduction Strategies, a San Juan Capistrano, Calif. company that assists businesses converting to self-insured plans. "

Also, regulations surrounding self-insurance vary depending on the state. Some states, such as Oregon, allow small self-insured groups with as few as two employees.

Other states, including California, Utah and Rhode Island are seeking to raise the deductible on stop-loss coverage, which could limit the participation of very small businesses.

2. The size of your bank account matters.

All states have requirements for how the funds that employees deposit into the trust to pay for their medical care need to be managed.

These deposits are not permitted to be mixed with company funds to protect the health and well-being of everyone participating in the plan.

"Self-insurance) is not the kind of thing a new company or one that's having cash flow problems should be doing," says Howard Soltoff, a principal with TriBridge Partners LLC in Washington, D.C.

3. You may look at your employees differently

As a rule, an older workforce will have more medical expenses than a younger one. But older workers usually don't take on dangerous hobbies like sky diving.

"If your group is very small, you'll have to weigh these health considerations carefully. It's about looking at what's the best coverage you can get for your group at the best rate, and there's a good chance that self-insurance may be a part of that package," Lack says.

A self-insurance plan can give the business some insight into how its employees use its medical dollars. Although specific procedures and prescriptions can't be divulged by law, the company can collect data on how much money is spent on items like preventive care and generic drugs.

In turn, this can create a problem that didn't exist when the company had a regular group insurance plan—the perception that the company has some inside knowledge about its employee's health issues.

"There have been instances where employees have pushed back," Soltoff says. "It's important to let people know how self-insurance works, and how you're all working together on this issue of staying healthy and controlling costs."

4. It adds to the human resources department workload

Learning a whole new system of self-insurance may ruffle feathers in human resources, but it doesn't have to stay that way.

"Once you get it up and running, a good self-insurance plan operates like a traditional health insurance plan," Soltoff says.

The setup typically has basically two steps:

1. Set up a separate bank account to handle deposits from employees and payouts to claims.

2. Hire an administrative service that takes the place of your insurer. The administrator helps rent a provider network from an insurer that your group can use and handles billing for the stop-loss premium and questions from group members.

Bottom line: Speak to your insurance broker early

If self-insurance is a possibility, start researching it at least six months before the open-enrollment period and speak with your accountant and insurance broker about the option.

"Because regulations can vary so much from state to state, it's critical to find out if you're even eligible first before thinking about it," Darling says.

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