Can self-funding work for smaller employers?

We are all familiar with the saying, “If you want something done properly, do it yourself.” But what if this saying was also true: “If you want something done profitably, do it yourself”?

When it comes to employee health insurance, most employers would probably balk at the idea of pulling the function in-house. Today, of course, most U.S. employers farm out their benefit plans—paying an insurance provider that contracts a network of doctors and hospitals to care for employees and manage claims and other administrative minutiae. But a shift in regulatory compliance and recent technology advancements mean the industry is now seeing a growing number of employers who are benefiting significantly by, in some part, becoming their own insurer.

The sickness pool

One of the challenges with the traditional approach is that employee health insurance is a statistical game of risk—and the odds may be stacked against many employers. In most cases when an employer pays premiums to a large carrier for health insurance, they are swimming in a giant pool with many, many individuals with significant health conditions. The carrier is exposing itself to risk, and everyone ends up subsidizing the higher-risk employee population.

Picture two very different employer environments, each with 500 employees on benefits. Within its employee population, one employer has 25 employees suffering from diabetes and other chronic illnesses, with two unfortunate cases of terminal diseases, for which its monthly premiums don't come close to cover treatment. The other employer, due to its business model and the industry it serves, has relatively young and generally healthy employees.

In either case, the insurance carrier is able to retain up to 20 percent of its fees to cover its cost of operations. But the carrier covering the employer with healthier employees still keeps its fees even if treatment is never required.

This general principle of sharing costs is why many employers are exploring or have already adopted some aspect of a self-insured model.

Wider access

Until recently, self-insuring was practiced only by large employers, those with headcounts in the tens of thousands with bargaining power to strike their own terms. But in most part due to changes in legislation and advancements in technology to help employers gain better visibility into decision support, and artificial intelligence to analyze actual costs and potential risks, the self-insured model is moving downstream to mid-market employers.

New software technology is making it easier for employers to access and manage health care networks and to pay claims directly for themselves.

Many states have significantly lowered the minimum headcount at which an employer is permitted to self-insure, slashing what was previously an artificial boundary and opening the practice up to many more employers.

Employers are becoming aware of the internal risk dynamics of the overall health of their employee pool—and those with low risk are saying, “I don't want to bear the burden of fees for illnesses my employees have little risk of getting.”

With the average cost of health coverage across the United States being $14,800 per employee, and continually on the rise, employers are looking for alternatives to traditional insurance to attract and retain a healthy workforce.

Doing it for themselves

So we are starting to see more advanced, forward-thinking companies cutting the cord with their traditional insurance carrier, contracting with a carrier primarily to license its network for a fixed price per employee per month.

Some industry reports suggest that as many as 87 percent of employees employed by employers with 1,000 to 4,999 W2s are utilizing a similar carrier relationship. Companies that self-fund can project costs accurately, maximize their cash flow and invest their savings back into their organization or their employees. Carriers such as Blue Cross Blue Shield offer this ability for around $10-$12 per person per month.

Self-funded plans operate on their own with third-party organizations, allowing businesses to save the profit margin that an insurance company adds to its annual premium for a fully insured plan.

Some companies are saving as much as 20 percent of the premium dollars they are spending on benefits by eliminating the administrative overhead they are paying their carrier. An employer with healthy employees may end up saving up to 50 percent or more on spend related to health benefits in this way, equivalent to paying $600 per person per month rather than $1,200, which is approximately the national average.

It's nice to see an uptick in employers utilizing technology to capitalize on this trend. Employers who go it alone say they find improved loss experience, reduced claim leakage, risk-appropriate rates and improved cash flow.

Should you go it alone?

Self-insurance suits some employers more than others. Construction, for example, may be seen as more injury-prone industry—but workplace injury is covered by other legislation and OSHA; construction workers are largely young, lower-income, tend to visit their doctors less often and are not prone to as many health risks associated with sedentary office jobs such as obesity or diabetes.

Employers should assess their own suitability and possible savings to decide whether self-insurance is the route to take.

Understand your claims history. Are you a high- or low-risk employer population? The devil is in the data, so employers should ask their broker to pull their claims history from current or prior providers. Compare with other, similar companies. When viewing claims-related data, it's ideal to focus on a look-back period no shorter than five years, if possible.
Comprehend the options. If your profile suggests claims are rare, ask your broker to explain whether self-insurance is a good option. Ask him or her to put together a package. You're at the a la carte buffet, so choose wisely, understanding all the costs and responsibilities involved.
Get mechanisms in place. Can you self-insure without burdening HR? Do you have the resources and skills to add a new corporate function? Self-insurance naturally involves some extra burden. Employers still using paper enrollment, those who don't already know which workers are on benefits, these are not good candidates to make the jump. But, increasingly, software is helping employers manage their employee responsibilities.
Embed wellness. One surefire way to reduce your risk profile is to implement a wellness program. By disintermediating the carrier an employer will save, regardless. But, by incentivizing employees to lead a healthier lifestyle, the benefits can be compounded.

Self-insurance will not be right for all employers. After all carriers had been playing this role for decades. Those which struggle may naturally turn to carriers to assist, but they will nevertheless seek smart, tech-enabled carriers that allow them to feel an enhanced sense of control.

Read more:

Rachel Lyubovitzky is CEO and co-founder of EverythingBenefits, a leading provider of next-generation automated benefits technology that uncovers hidden costs, eliminates errors and helps keep companies compliant.

Complete your profile to continue reading and get FREE access to BenefitsPRO, part of your ALM digital membership.

Your access to unlimited BenefitsPRO content isn’t changing.
Once you are an ALM digital member, you’ll receive:

Breaking benefits news and analysis, on-site and via our newsletters and custom alerts
Educational webcasts, white papers, and ebooks from industry thought leaders
Critical converage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor