As we bear down on the first date of compliance with the ACA, much has been written about the benefit of shifting coverage to a self-funded plan because self-funded plans are not subject to many of the requirements of the ACA. The suggestion is that self-funding might actually be more affordable that simply purchasing insured coverage. But cost cannot be the only consideration. So how does one decide to self-insure a health plan or go the fully-insured route? Insurance premiums continue to go up, but on the other hand, self-insuring a plan has its own set of risks and burdens to consider. 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 the employer, as plan sponsor, has the responsibility for ensuring proper administration 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 of other employers and their exposure is limited, to some extent, to 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 the obligations related to being a plan sponsor and the notice and documentation requirements. Even if the employer contracts out for administration services, the obligations of compliance still fall to the employer. And don’t forget about discrimination testing. Self-funded plans are subject to testing requirements that are not in place for insured plans. Plus there are the added reporting requirements of being self-funded. The annual cost of these types of administrative issues has to be taken into account before making a final determination. And there is the need for more professionals, like lawyers, administrators and consultants.
In the end, no one can say automatically which option is best for your plan. It is a conversation that you might want to have with your broker, benefits adviser or legal counsel. It should not be just about cost, but also about capacity and capabilities and the administration of a self-funded plan can place a substantial burden on company employees charged with maintaining the plan, particularly if they are not familiar with how benefit plans operate. So 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 and abilities. In the end, the real question is what works best for your company.