Employees still pay premiums and deductibles, but the employer covers claims up to a certain level called an aggregate attachment point, which are 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 or high levels of claim activity. 

“When an employer goes self-insured, it is assuming 100 percent of its exposure to the benefits plan,” says Kurt Ridder of Spectrum Underwriting Managers, Inc., of Indianapolis, Ind. “No matter what the stop-loss is, the claim's responsibility lies with that plan. The employer is on the hook. What the smart employer or third-party administrator does is buy the stop-loss policy to cover.”

To construct the plan, employers should perform a health risk assessment to build an appropriate benefits plan design. Employers also will need to engage a third-party administrator to help manage the plan's administration. 

The main cost savings of self-funded results from the plan design. Instead of buying an entire menu of health care services and claims management from a fully insured plan, employers can purchase coverage a la carte, meaning they can buy only coverage that meets their employee needs. Very small employers, however, should expect some limitations in the self-funded plan offerings.

 Obvious candidates for converting to self-funded are employers that don't see fluctuations in their health care costs over a period of years. 

“Stability is key,” Carlson says. “If every year you're going up and down on your health care costs, self-funding is probably not for you. But as long as you're fairly consistent over time, it's a good program.”

While self-funding may not work for every employer, brokers shouldn't expect doors to be closed when discussing the options with small and mid-size employers. 

In many cases, they'll face a potential client used to a little uncertainty in their business. 

“You'll find that small employers are entrepreneurial by nature. That's been our experience, you've got people that are willing to take some risk, most of those people took big risks to get their business started. They're not strangers to laying it all on the line,” Ridder says. 

The drivers

Unsurprisingly, the Patient Protection and Affordable Care Act of 2010 has played a major role in self-funding's growth. 

The act established minimum-loss ratios for health insurance companies of 85 percent for large groups and 80 percent for individual and small group markets. Large health insurance companies passed increases on to their clients while they figured out new profit models under PPACA. Small- and mid-size employers looking for different ways to lower the cost of their health insurance offerings began considering self-funding. 

“The wording in the act relative to the minimum-loss ratios has created interest in alternatives to fully insured plans,” says Stephen Rasnick, president of Self Insured Plans of Naples, Fla. “It has created an enormous amount of interest in self-funding.”

The key to self-funding is the stop-loss policy. While that type of coverage has been around for some time, PPACA contributed to an environment where stop-loss insurers could offer the coverage to organizations with fewer and fewer employees.  

“Historically, there have never really been stop-loss policies that were well-suited for a smaller market,” Rasnick says. “The dynamics of the marketplace have created opportunities for employers with 15-20 employees. There are a lot of employers that wanted to self-fund but couldn't do it because stop-loss policies were developed for employers with 75-100 employees. And now they're down to 15-20 employees and they're even down to five employees.”

Another driver in self-funding area has been a long-standing frustration by some employers with fully insured plans.  

“So many employers are frustrated that they don't know why they're getting the increases they are,” says Pavlina Sustr, an account executive with IMA, Inc., in Denver. “The trend is 12 percent and they're looking at their company and seeing healthy people and asking, 'Why am I getting increases every year?' With self-funded, you can see what's going on.”

The benefits

Though self-funding exposes employers to risk, the right strategy and patience also bring rewards. 

Sustr says employers looking to go self-funded should be prepared to make a multi-year commitment to the strategy to fully realize its benefits. 

“Self-funding is not a one-year cost savings, it's a long-term strategy … and that is the key thing to understand—it's not a one-year fix,” Sustr says. “Overall within three years, it will save money.” 

Employers with stable health costs make for good candidates to go self-insured. Even if that's the case, industry sources say, employers should perform a health-risk assessment. The assessment will help employers see if there is cost stability and select a coverage package that lowers their cost. 

“We try to encourage employers that No. 1, data is king. If they can get the right data and have low turnover, we can design a custom-fitted plan that will help them meet and achieve their budget and benefit level to produce longevity for employees,” says Terry Chesser, principal of U.S. Advisors, Inc., of Brentwood, Tenn.

In addition to information gleaned from a health-risk assessment, employers will be able to obtain information that can help them make decisions on where to best allocate their resources in real-time. 

And more information means better business decisions. 

Many plans allow employers to pool money for a “rainy” day. Employers who save money in unpaid claims during a certain month can even apply it to future costs. And some employers choose to write it down as a cost savings, which helps the bottom line. It's all in the employer's hands. 

At IMA, Sustr says, some of her company's self-funded plans allow employees who quit smoking or lose weight to save money on their monthly premiums—and that can help an employee's bottom line.

Employers can impact costs in other ways, too. Thanks to self-funded plans, employers have instituted wellness programs to help the employees lead healthier lifestyles. 

“What's happened is that smaller employers have the ability to consider creative ways to impact cost,” Chesser says. “You have more wellness programs and increased benefits designs to help level the playing field. You have more support services where the employer was being sure everyone was getting the attention and medical treatment they need so that catastrophic cases could be minimized. We all know that 20 percent of employees use 80 percent of the benefits. What you try to do is take those 20 percent and incentivize them to change habits. In the past, you'd say, 'You shouldn't smoke,' and 'They'd go so what?' Now, they say, 'We'll reward you with a $50 gift certificate if you quit for six months and $250 if you're off for a year.'”

Across the country, wellness programs have evolved to offer smoking cessation courses, nutritional help and exercise programs among other offerings.  

Chesser says some small employers are also providing more cost-effective health care in different ways under self-funded plans. Some employers provide staff nurses or doctors on-site. A staff doctor can take care of on-the-job injuries, which saves on costs associated with an emergency room visit. Staff nurses can administer shots or provide guidance on when to see a doctor. 

The regulations

As more and more employers embrace self-funded plans, there's the possibility of more and more regulation. 

In April, the state of California amended a bill to effectively end stop-loss policies for organizations with less than 50 employees, according to the Self-Insurance Institute of America. In that case, the state says that stop-loss companies are providing health coverage for individuals and dependents. That's not what stop-loss is. Stop-loss covers the employer in cases of catastrophic claims or high levels of activity, not individual plan participants.

Industry sources say there's a high-degree of misunderstanding about self-funding on most levels of government. The key is to keep abreast of the regulatory environment and know what's coming, they say. 

“There's a lot coming down the pike—much of it at the state level,” Ridder says. “The regulators have a hard time understanding the whole concept of self-insurance and how it plays out. They're trying to get their hands around it.”

The best way for brokers to stay abreast of the changes in self-funding is to keep up with self-funded industry trade groups. 

Regulatory updates and other news that affects the industry can be found at websites for the Self Insurance Institute of America and the Society of Professional Benefit Administrators. 

And everyone should be on the look-out for the Supreme Court's ruling on PPACA. Regardless what some pundits say, the rules could change all over again. 

Maybe Chesser has the best advice for small to mid-size employers in this time of new thinking and creativity. “Every employer should have a plan A, a plan B, and a Plan C,” he says. 

Nathan Solheim is a Denver-area writer. He can be reached at [email protected].