02 Jan To Insure or Self-Insure: That is a Good Question
So how does one decide to self-insure a health plan or go the fully-insured route? Not an uncommon question in a marketplace where health insurance premiums seem to be rising almost daily. But on the other hand, self-insuring a plan has its own set of risks. So what are some of the things to think about when considering either option? Here are some issues that I commonly see related to that decision.
Remember that when a plan is self-insured, it means the employer is paying all of the health care costs plus administration costs—not “just” premiums. So the employer bears the risks and is ultimately on the hook for the costs of coverage. And compliance. Plan sponsors of self-insured plans are faced with real dollar-value problems related to high claims levels, maintaining adequate stop loss coverage (and premiums for that coverage) and fluctuating costs of new treatments and medications. On the other hand, they are not paying for risk. They are paying for actual claims. So the actual dollars spent on claims in a given year can be significantly lower than one would pay for comparable insurance coverage.
Insured plans work so that the insurance company is ultimately responsible for the health care costs and the employer pays premiums. The only costs concern is the premium dollars. The insurance company bears the risk (which is built into the premium) so fluctuating costs and unexpected high dollar claims are simply absorbed by the carrier. Sure, they might increase your premiums next year, but a catastrophic high dollar claim won’t immediately impact the company bottom line. Plus, most costs of administration are borne by the insurance carrier, not the employer.
Most companies that move to self-insured plans do so because of the size of their population because it becomes less expensive for them to pay for all of the medical expenses than to pay the premiums required by the insurance company to take on the risk. Smaller companies can consider self-insuring as an option, but they have to be wary of the possibility that significant claims costs can adversely impact revenue streams. Companies with stable populations or populations with younger, single employees seem to statistically have lower claims experience and might be better candidates for self-insuring. However, population stability can be tricky to maintain and companies should be keenly aware of anti-discrimination laws protecting employees based on age and marital status (in other words, don’t create a policy of only hiring 25 year old single men to keep health costs low).
Of course any discussion of plan funding should start with an understanding of your annual claims experience, preferably measured over a period of time. If you are thinking of going to a self-insured plan, or going from self-insured to fully insured, it is best to know what your claims history actually looks like. It may be that simple plan design changes can be made that make your current funding status more affordable. And don’t forget that whether you are insured or self-insured, you should always be cognizant of the obligations related to being a plan sponsor and the notice and documentation requirements.
In the end, no one can say automatically which option is best for your plan. But it is a conversation that you might want to have with your broker, benefits adviser or legal counsel. But don’t make a decision based on a blog you read on the Internet. Make it based on the facts specific to your company’s needs.
by Keith R. McMurdy