Three Reasons Your Company May Be a Candidate for Self-Insuring your Employee Medical Plan
One of the biggest misconceptions in the world of business insurance is that self-insurance only works for larger companies with 500 to 1000 employees. Our experience has shown that this is no longer the case; that even companies with 100 or more employees can reap the benefits of self-insurance.
Perhaps this misconception comes from business owners not fully understanding the difference between self-insurance and traditional fully insured.
Traditional Insurance vs Self-Insurance
Fully insured plans involve a fixed monthly premium paid to an insurance carrier, based on the number of employees and dependents enrolled in the plan. The carrier pays for health care claims, while enrolled employees and dependents pay any deductible amounts or co-payments for those covered services.
Most employers never know if they have overpaid, and it is unlikely their rates will ever go down. Even if they underpaid, they will likely get a rate increase any way. Unless the employer is quite large, no claims utilization - meaning how much was spent on claims - is typically provided by the carrier.
Self-insured (self-funded) plans can be individually tailored to balance risk and monthly cost. Your total self-insured cost will combine fixed monthly costs such as administrative fees and stop loss premium based on plan enrollment. Health care claims are paid by the employer, and costs vary from month to month, based on the medical services used by enrolled employees and dependents.
Stop loss insurance is purchased to protect the employer from large claims per individual member and/or overall high plan use. Additionally, self-insured level funded plans are available to provide a fixed monthly payment for each covered employee and dependent. Under a level funded plan, utilization is tracked and reported monthly, but the monthly cost does not fluctuate. At the end of the plan year, a portion of unused claims will be returned to the employer.
The truth is that self-insurance does involve a degree of risk and the possibility for higher medical costs due to unanticipated trend/inflation increases will always exist. However, the risk is almost always outweighed by the potential for cost savings simply because self-funded companies only pay for the services their employees receive. With fully insured plans you pay expected claims costs, insurance company profits and plan administration costs in addition to premium tax on total dollars.
When we compare traditional and self-insured plans over a five-to-seven year period, the self-insured plan will end up costing the employer less. Even if the self-insured plan experiences two or three high-cost years, total costs for this extended period are likely to produce an overall savings. Plus, you then get to reset the clock and start fresh. With traditional insurance, a single bad year can trigger rate increases which will are unlikely to ever to go back down in the future. And again, employers only pay for what their employees are using.
Can my company be self-insured?
So, now that we know the difference between traditional and self-insured plans, how do you know if your company is a good candidate for self-insurance? Ask yourself these three questions:
- Has your company consistently been receiving trend/inflation increases each year in your annual premium over the last three years, which in Southern California is around 9-12% annually? If so, this says your claims exposure is lower than average.
- Are you interested in better understanding where your dollars are being spent, so you can have better control over those dollars? Traditional insurers have no obligation to release claims information, nor are they required to, which pretty much leaves the employer clueless. You could be in the throes of a great employee wellness campaign, but have no information to target your efforts.
- Do you have above average employee participation (75% or better) and contribute at least 75% of the employee premium to the benefits plan?
If you answered yes to these three questions your company is likely a good candidate for self-insurance!