Small employers can avoid the requirements of the health reform law altogether by going the self-insurance route. It is that simple, assuming the numbers work and the plan is properly structured and back-stopped by a reputable insurer.
About 60 percent of insured American workers already are in self-insurance plans, although until recent years this was a type of plan funding mechanism that only unions and large employers were able to utilize. That is now markedly different as the insurance industry has designed plans for employer groups as small as ten insured employees.
According to a Kaiser Family Foundation Survey, just 15 percent of insured workers at firms with fewer than 200 employees are enrolled in self-insured plans, compared to 81 percent of insured workers at larger firms.
In a recent study by Munich Health North America, a subsidiary of reinsurer Munich Re, employers are expected to increasingly do away with providing group traditional health insurance to their employees and are expected to instead self-fund their plans.
In short, self-funding is the absence of health insurance provided by a third party. Self-funded health plans operate by paying claims from the plan sponsor’s general assets, usually combined or offset by participant contributions, instead of purchasing insurance through an insurance company by paying premiums. In some cases, plan sponsors pay claims from a trust that is funded by plan sponsor contributions and participant contributions. Self-funding also is called “self-insurance,” which indicates the plan sponsor’s assumption of the responsibility to pay benefit claims and to accept the risk of those claims exceeding its expectations, thereby self-insuring the risk.
Employees still pay premiums and deductibles, but the employer covers claims up to a certain level called an aggregate attachment point, which is based on the total number of expected claims over a year. The attachment point essentially sets the employer’s maximum exposure to costs. When claims exceed the attachment point, employers purchase stop-loss policies that reimburse the employer for costs associated with catastrophic claims, high levels of claim activity, and unforeseen cash flow demands to fund claims. In essence, the best you can do in a fully insured plan is analogous to the worst you can do in a correctly designed self-funded plan.
Interest has increased in self-funding in the wake of PPACA for a variety of reasons:
New fees and mandates for insurers. Insurance companies are facing a variety of new fees under PPACA, which will likely increase expenses, which will be reflected in premium rates and passed on to policyholders. PPACA also imposes rating limitations, as well as guaranteed-renewability and guaranteed-availability rules on insurers that are anticipated to drive up costs (and as a result, premiums). Employers that complete a cost/benefit analysis comparing the rising cost of insurance premiums to the costs of self-funding may find that self-funding could generate savings.
Less risk if employer decides to go back to insured plan. Under the guaranteed availability rule mentioned above, beginning in 2014, health insurance issuers in the group market must allow an employer to purchase health insurance coverage for a group health plan at any point during the year. Because of this rule, employers who attempt self-funding and find it too costly may find it easier to move back to an insured product. This may encourage those employers who thought self-funding was too risky in the past to give it a try.
A growing number of employers are adopting this approach because the plans are low-cost alternatives to conventional coverage since they are exempt from PPACA requirements such as insurance taxes and mandated benefits.
Easier integration of wellness programs. In particular, PPACA has increased the permissible differential in the cost of coverage that employer plans may charge depending on whether an employee participates in a wellness or disease management program (particularly targeting tobacco use). Employers wishing to implement wellness or disease management programs may find that integration of these programs is easier in a self-funded arrangement. Self-funded plans may also be able to better tailor wellness programs to the needs of their employees because they will not be limited to the products available from insurance companies. Finally, some self-funded plan sponsors may realize savings from their wellness or disease management programs much more quickly than insured plan sponsors, who have to wait for the savings to trickle through the experience rating in future insurance premiums.
Here are seven quick reasons why self-insurance should be in the mix when evaluating your employer health plan options:
1-Self-insured plans are not tied to community rating for determining premiums as are fully insured arrangements.
2-Self-funded plans are more adept at allowing employers to determine what its true costs of coverage are.
3-Self-funded plans are likely to be in a better position to manage future uncertainty because they escape greater regulation than the health insurance industry faces.
4-Review of premium increases by the Department of Health and Human Services under PPACA doesn’t apply to self-funded plans. Premium increases are most often based on claims experience, with large claims thrown out.
5-Self-funded plans avoid the adverse selection insured plans frequently encounter.
6-Self-funded health plans, for most employers, are governed by the Employee Retirement Income Security Act of 1974. ERISA preempts state insurance regulations, meaning employers with self-funded medical benefits are not required to comply with state insurance laws that apply to medical benefit plan administrators.
7-Self-funded plans avoid the essential health benefits mandates of PPACA. The services mandated for fully insured plans by PPACA are expected to increase premiums from 10 percent to as much as 20 percent. The main cost savings of self-funded results from the plan design. Very small employers, however, should expect some limitations in the self-funded plan design offerings.
Self –Insurance can be a tremendous advantage for employers, now both small and large, but it should be correctly viewed as a long term strategy and not a one year fix, even if PPACA makes exiting suddenly much easier.