Ready to say good-bye to health insurance premiums forever? That may sound like an advertisement for snake oil, but it’s actually one of the perks of self-funded insurance. Instead of paying premiums to a third-party payer, self-funded insurance shifts the risk to employers who pay for employees’ health claims directly.
A surprising number of companies are self-insured. A 2018 study by the Employee Benefit Research Institute (EBRI) found that 79 percent of large employers, 29 percent of mid-size employers and 17 percent of small companies offered at least one self-insured plan to employees.
If you’re ready to consider self-funded insurance for your employees, there’s a lot to keep in mind, says Kim Troup, director of benefits for XMI. Below, she lays out the top self-funded insurance pros and cons.
Pro: Self-funded insurance eliminates traditional health insurance premiums. As a result, there are also no state or federal premium taxes to pay. On the surface, this could make self-funded insurance appear to be the more affordable option. But there’s a tradeoff to not paying premiums—and it’s a big one.
Con: Companies that self-insure assume the risk of providing healthcare coverage for employees directly. If employees are healthy, great. Your healthcare costs should be pretty low and your decision to self-insure was probably a financial sound one. But if your employees get hurt or need a major surgery? Those claims can add up pretty quickly and could easily exceed the premiums you would have paid to an insurer, making strong cash flow a must.
One of the ways employers can shield themselves from some of the risk associated with self-insurance is by purchasing stop-loss insurance. Also known as excess insurance, this coverage protects employers in the event of catastrophic claims that exceed pre-determined levels. But this type of insurance is also risky, since it’s issued annually without a guaranteed renewal. If your healthcare costs rise unexpectedly, your premium could skyrocket, or your policy could get canceled.
Pro: Self-funded insurance plans are not subject to certain Affordable Care Act requirements. With the ACA came a series of regulatory requirements that, nearly 10 years later, continue to hurt smaller firms, causing coverage to be both more expensive and administratively burdensome. Business that self-insure are exempt from many of these headache-inducing provisions, including the Essential Health Benefit requirement and community rating requirements. But don’t think self-funded insurance is free of administrative burdens.
Con: Self-funded insurance carries its own set of administrative burdens. Despite the ACA-related exemptions, self-funded insurance is still subject to ERISA, HIPAA and other regulations. Without operational knowledge of how these work, companies with self-funded insurance could find themselves at an increased risk of regulatory penalties and lawsuits due to poor management, understaffing or a lack of understanding of medical privacy laws.
Pro: Self-funded insurance plans tend to be more flexible. Instead of choosing from a limited number of group plans, self-insurance offers employers the flexibility to design their plan to match the needs of their workforce. Selections can be made for networks and plan design.
Con: The selections you make could end up being the wrong ones for your workforce. Group plans are designed to meet the needs of most people. If you go too narrow or make wrong assumptions about your worker demographics, you risk leaving some employees behind.
Pro: Self-insurance makes it easier to access data on actually healthcare utilization. This data can not only help you make smarter selections on plan design, it can also help you identify cost-saving opportunities. For example, a deep dive in the data could reveal a large number of employees going outside of network, which could trigger employee education around how to choose in-network providers.
Con: Access to data and inadvertently using it in the wrong way can open the door to HIPAA violations, privacy concerns and possible lawsuits. This is another reason having knowledgeable administrators and trusted advisers is key to being successfully self-insured.