Business owners considering offering health insurance benefits to employees may consider self insured plans to reduce the overall monthly cash flow paid into benefits. Health insurance costs continue to rise and the Affordable Care Act has mandated businesses with a minimum of 50 employees to offer health insurance.

The rule of thumb in the insurance world is self-insured plans is typically reserved for large companies with deep pockets to cover any financial loss, even catastrophic issues. With that said, the Self Insurance Institute of America (SIIA) says that there are feasible models for companies with as few as 25 employees.

How do you choose what is best for your company?

There isn’t a straightforward answer to this question. While many companies use fully insured plans, others function very well with self-funded plans. Others work with Professional Employer Organizations (PEO) to get all of their human resources needs combined under one third-party provider. When it comes to human resources and health insurance, every company is different and should consider all options before proceeding.

Define Self Insured Plans

A self insured health insurance plan is a benefits plan where the employer assumes 100 percent of the financial risk associated with employee health claims. This means the employer is offering employees the equivalent of a comprehensive health insurance plan but isn’t paying the premiums directly to a health insurance carrier.

The employer instead uses cash reserves to pay claims directly as they occur. Self-insured companies put money into a designated trust fund that is reserved for medical claims and maintain a minimum balance in the account to give employees the confidence that claims will be paid. This account is called a reserve account is generally considered assets unusable for business operations, meaning once funds are deposited in the reserve account they shouldn’t be used for other business needs.

Define Fully Insured Plans

A fully insured health plan is one where the employer pays fixed monthly premiums to an insurance carrier who then provides comprehensive health coverage to the employees. When claims occur, the carrier works with medical providers to pay the claims. Larger employers often have the ability to negotiate with health insurance providers to get better rates on the whole policy.

Fully insured plans are subject to annual re-evaluation and premium adjustment meaning that the policy typically goes up every year. However, for the price, employers eliminate all risk of paying, managing and administering health insurance for employees.

Employee Recruiting and Benefit Plans

Health insurance is one of the first things new recruits ask about when the compensation package talks begin. When a company is serious about its recruiting efforts to attract the best talent, it knows that health insurance is imperative. Even small companies can get away with not having full benefits packages, but those that don’t offer health insurance are put in a lower tier level for those looking for new employment.

The reason is simple: health care is expensive. Even a moderate policy for a family can cost $12,000 annually. Having a health insurance plan that covers an employee’s biggest concerns goes a long way to building confidence that you are a legitimate employer willing to invest in people.

Comparing Self Insured Plans to Fully Insured Plans

Choosing between a self insured plan and a fully insured plan is a financial decision for business owners that requires understanding the potential need, likely claim costs and financial resources to cover those claims.

In a self-insured program, the company maintains all financial risk whereas in a fully insured plan, the company has fixed costs with the health insurance carrier bearing the major financial risk.

A company that wants to save money now by not having large premium payments to make may like the idea of self-insuring. But it isn’t that easy. The company has to have the right financial reserves to cover typical claims and be prepared for catastrophic loses. If a company has 50 or more employees, it is required to offer employees comprehensive health care according to the Affordable Care Act (ACA).

An Example of Self Insured Health Insurance

Happy Organizations Training is a company with 30 employees in a small town. It isn’t required to offer comprehensive health insurance per the ACA, but wants to give its employees the confidence to see a doctor when necessary.  It conducts a cost analysis for the company, looking at its workforce profile, medical claim history and costs of local medical care.

The cost analysis showed that the company would need a minimum of two months of reserves based on the annual claims. To accommodate catastrophic claims, it would need seven months in reserves to remain compliant with ERISA regulations. Happy Organizations Training determines that it has a healthy workforce that is worth the risk of self-insuring and has the seven months of reserves already on hand to do so.

Before Jumping into Self Insure Plans

Check with your local labor board to determine what federal and state laws you must comply with before self-insuring. Every state is different when it comes to health insurance. So, while you may be compliant with the ACA, check to make sure you are compliant with the Employee Retirement Income Security Act (ERISA), Health Insurance Portability and Accountability Act (HIPAA), Consolidated Omnibus Budget Reconciliation Act (COBRA), the Americans with Disabilities Act (ADA), the Pregnancy Discrimination Act and the Age Discrimination in Employment Act.

Every employer needs to fully understand the fiduciary responsibility of self-insuring health care for employees. Funds cannot be commingled and used for other operating expenses. Additionally, the employer becomes the administrator unless it hires a third-party administrator (TPA). As the administrator, he must properly handle claims. This includes timely processing as well as appropriate claims approval or denial.

The Reserve Account for Self Insured Plans

The reserve account for self-funded health care plans should be considered non-operational money for the business. This means the account is held in trust and available for audit by employees who are technically stakeholders in the account management. Employees have a right to know that the reserve account is fully funded and not being used for other business purposes, even for short-term cash flow funding.

Advantages and Disadvantages of Health Plan Structures

There are pros and cons to each type of health plan structure. While nearly 50 million employees get health insurance via a self insured benefits plan that covers all essential health benefits, employers need to see both sides.

Pros of Self Insured Plans

The benefits of self-funded health care start with financial savings; employers can save money in the long run by not having to pay monthly premiums. Employers can control benefits more directly and cut the costs of health insurance carrier profits, making the plan cheaper overall in every respect. It also forces companies to promote preventative health care that keeps employees from long-term health issues resulting in catastrophic claims.

Cons of Self Insured Plans

The significant downside to self-funded health care is the level of financial risk the company faces. It can take time to accumulate adequate reserves well beyond the minimum requirements to make the long-term savings worthwhile. Essentially, many companies need to invest in the program before it really starts to save.

Because employers are responsible for all service payments, they bear an unknown financial risk that doesn’t have a cap. A self-funded plan also requires employers to handle all areas of administration, including claim denial which can lead to negative employer-employee relations.

Pros of Fully Funded Plans

Fully funded health plans have several benefits for employers. There are less administrative services tasks required by the employer since the health insurance provider handles claims and processing. Cash flow is more regular as the monthly premiums are fixed with few cost variances.

Risk is transferred to the insurance company, alleviating the company from catastrophic claims. Larger companies are also able to negotiate with insurance companies for better deals.

Cons of Fully Funded Plans

A fully funded health plan does have downsides that include rising costs from year to year. Already high premiums steadily climb annually. Communication with large insurance companies isn’t always straightforward and leads to frustration in the claims or administration process of the policy. There are additional tax burdens paid based, adding to the already higher costs.

Stop-Loss Insurance to Mitigate Financial Risk

Stop-loss insurance coverage is a strategy that limits or caps the total amount a claim could cost an employer. Often part of self-insured retention strategies in other industries, stop-loss coverage allows an employer to pay claims to a defined amount and administer all coverage until a cap is met. When that is met, the catastrophic plan kicks in to cover the remainder of the costs.

Employers would need to buy a secondary policy to cover the excess and are responsible for all claims and plan administration costs until the stop-loss insurance plan kicks in. However, it protects an employer from unknown financial loss. For example, a self-insured health plan may cap its personal coverage limits at $100,000 and have a stop-loss insurance plan to absorb costs beyond that.

If claims hit the $105,000, the self-insured company would pay all $100,000 and pay to administer them. The insurance company would only be responsible for $5,000 in claims. The cost of this type of insurance policy is less than the cost to pay monthly premiums for the entire plan. It is a way for plan design administrators to save small and mid-sized businesses money without completely absorbing the entire risk.

Specific Stop-Loss

Specific stop-loss covers large claims from one individual covered under the plan. For example, an employee who is diagnosed with cancer and has a series of costly treatments and surgeries is covered once the high-limit deductible is met.

Aggregate Stop-Loss

The aggregate stop-loss covers the total policy plan from all claims paid during a policy period, usually within a year. This means that all the claims combined would need to meet the company cap and then the insurance company would pay the cost of claims.

Stop-Loss insurance is often a reimbursement policy meaning that the company is still administering the claims and paying providers. Upon meeting the stop-loss deductible, the company files for reimbursement from the insurance carrier for the amount exceeding the cap.

Insurance carriers structure these policies differently, so self-insured plan administrators need to really shop for a plan that fits the overall objective of the policy.

Likelihood of Catastrophic Claims

There are more claims resulting in higher medical costs. PPOs such as Blue Cross and Blue Shield attest to the rising cost of medical care and increasing need for medical coverage plans that have higher limits.

A 2016 study showed that 70 percent of stop-loss policyholders filed a claim for reimbursement for at least one catastrophic claim. More than $6.7 million in claim reimbursements were made in 2016 due to complications in childbirth of twins alone. While self-insured health insured options are designed to save money, insurance exists to protect against significant financial loss. This is the reason stop-loss insurance policies are added to the plan design.

The Comprehensive Health Care Option

When considering offering fully insured plans such as comprehensive health care instead of a self-insured plan, consider the types of plans you can offer. The most common choices are a PPO and an HMO. Blue Cross Blue Shield is a commonly known PPO while Kaiser Permanente is a commonly known HMO.

PPO Health Care

When you sponsor a Preferred Provider Organization (PPO) health care plan, employees have the option to choose providers. There are no gatekeepers to see before getting to a specialist for specific conditions. Many employees like the PPO option because they have many doctors to choose from with some benefits covering out-of-network providers. However, the PPO option is more expensive than an HMO on a monthly basis.         

HMO Health Care

A Health Maintenance Organization (HMO) health insurance plan focuses on prevention. This plan design uses a primary care physician as a gatekeeper to oversee all medical services requiring plan participants to see their primary care physician for referrals out to specialty services. Out-of-network care providers have limited or no coverage and there is generally fewer options for doctors. However, an HMO is generally less expensive than the PPO alternative.

Talking to a Health Insurance Broker

Even if you are leaning towards a self-funded health insurance plan, take the time to develop a relationship with a reputable health insurance broker such as Dinsmore Steele. Health insurance brokers exist to learn about your business needs, find the right plan for your business needs and then negotiate the terms of the final plan design.  They work for you and get paid by the insurance provider but have a fiduciary responsibility to make sure the business’ needs are addressed.

Even after weighing the options for benefits plans, you may decide that a stop-loss insurance plan is needed. A broker will also help you set this policy in place and make sure it covers the gaps you are most concerned with regarding catastrophic claims.

A PEO Alternative

Many small employers are looking to Professional Employer Organizations (PEOs) to provide comprehensive employer-sponsored health insurance and other employee benefits without breaking the bank. PEOs are able to spread the risk and utilize economies of scale to reduce hard costs for insurance premiums and administrative costs for running employee benefits programs.

A small to mid-sized business can get health insurance, workers’ compensation, retirement planning, compliance assistance and human resources training through a PEO. Costs average around two to four percent of annual payroll for basic services contracted through a PEO.

When thinking about the costs of health insurance and other employee benefits, small firms may find that the overall cost savings of partnering with a PEO not only saves money but also alleviates many of the headaches of human resources issues. Regulations, policies, employee retirement are the specialties of the PEO taking administrative services off client companies’ plates to allow them to focus energy on marketing, sales, and operations.

Final Thoughts on a Self-Funded Plan

There is more than one way to get a business to the pinnacle of success. The same can be said for providing health insurance and employee benefits. There are many options and all are widely accepted by employers across the country. The best things a business owner can do it so review all options and shop intelligently.

When evaluating cost-savings, consider the bigger risk and whether the business is able to handle catastrophic claims. If a major claim is a burden on the business, it might be better to utilize one of the many fully-insured plans available. Consider the other benefits being offered and plans for human resources growth.

If your company is growing and has extended administrative services and employee benefits requirements, talk to a PEO broker who can review your company’s needs. He then helps identify the proper plan design customized for your small business. There is no risk in speaking with a PEO broker to review your options before making final decisions about health insurance and all employee benefits.