Part of what makes the self-funded plan so risky for small businesses is the unpredictable nature of health insurance plans, says Kristine Kassel, president of Benefits By Design in Tempe, Ariz. Some years there could be no large claims or influx of health issues, but during others, there might be an unexpected hike. Small-business owners must be prepared for either situation.

"You can have four people with heart issues or car accidents, so there's too much risk," Kassel says. "You can't bet on health because there are so many unforeseen things can happen."

Despite the potential risks, according to a recent survey by Volk & Bell Benefits, more small businesses are now examining the benefits of self-funded plans. With PPACA, there are many unknowns in the health care world, but one thing is certain – health care costs continue to grow each year, and small businesses are examining every possible avenue.

In fact, health plan renewals have been increasing annually by 12 to 30 percent, depending on the group's size and experience, Adams says, and that's enough incentive for small businesses to start shopping for other options.

The impact of self-funded plans

With self-funded plans, there is greater flexibility in plan design, says Lenny Sanicola, senior benefits practice leader of WorldatWork in Scottsdale, Ariz. The state mandates are not applicable to self-funded plans, allowing employers to design a program that works best for them.

"Self-funded plans, under the Employee Retirement Income Security Act, allow organizations more flexibility in the design of their benefits plans since self-funded plans are not subject to state-mandated benefits," Sanicola says. "So if I am an employer that has operations in many states, by being self-funded I am able to design a program that offers my entire work force consistent and standard plan provisions through a national benefits program, without being subject to varying state coverage requirements."

Some of the customizable plan design features include determining deductible amounts, setting up a health reimbursement account and adjusting copays, Adams says. Employers can talk to their employees to see what features are important to them and customize the plan to best fit the workforce.

Small businesses are also more open to self-funded plans because there is now better access to claims, trend data and stop-loss reinsurance, Sanicola says. Today's carriers are more willing to work with small businesses and provide better protection in limiting an employer's liability. 

"These organizations, like their larger counterparts, are finding that they are better able to control their costs, especially in combination with health and wellness initiatives, and better predict and manage their future health care expenses," Sanicola says.

But before small businesses start abandoning traditional health plans, there are certain considerations their human resources departments should analyze, one being the necessary commitment to self-funded plans. Leaving a self-funded plan is difficult, Kassel says, because there is a six-month period where the claims are carried over, and the employer still has to pay those claims along with its new plan.

"You're almost paying double, and that could last three to six months, so people don't like the experience of getting out of them," Kassel says. "You really have to give it a good couple years of experience before you jump out of it because in your first year you can't really see the benefits of it."

Though more small businesses are looking at self-funded plans, which do have their advantages, Kassel does not recommend them for groups under 25 employees. The risk is just too large, she says, but ultimately, it's up to the employer to analyze the potential gambles and decide on the best option.