Tired of shelling out more money every year for higher healthcare premiums? If you’re searching for a way to lower health plan costs for your small business without undercutting employee benefits, self-insurance might offer a remedy.
Self-insurance allows employers to keep the funds they would otherwise spend on plan premiums in exchange for assuming the risk of providing health insurance coverage for employees directly. With self-funded plans, businesses pay healthcare costs for employees out of a designated fund they create and maintain themselves.
Self-funding healthcare coverage is common in large firms. But few small firms—those with 100 employees or less—traditionally pursue this route. Most prefer to buy healthcare insurance from a group provider that handles payment of all claims.
This is changing, though, due to increasing costs and regulations in today’s healthcare market. New mandates and administrative costs have nearly doubled the cost of health insurance over the last decade. Employees at small firms shoulder a greater share of healthcare costs in premiums and deductibles than those at bigger companies. And many small businesses are discontinuing health benefits altogether due to costly premiums that continue to climb, according to a 2018 Employer Health Benefits survey by the Kaiser Family Foundation.
To keep healthcare offerings intact for employees, a growing number of small businesses are trading group plans for self-insured ones. From 2013 to 2016, the number of small employers with self-insured health plans rose from 13 to 17 percent, according to a report from the Employee Benefit Research Institute.
Perks of Self-Insurance
The Affordable Care Act created some regulatory incentives for small firms to self-fund healthcare, including:
- Exemption from the ACA’s Essential Health Benefit requirements, which require plans marketed to small firms to include maternity care, mental health and preventative services.
- Exemption from community rating requirements, which pools risk for individual firms across its overall group population and often results in adverse selection and higher rates.
- Exemption from federal and state taxes on healthcare premiums paid to traditional insurers.
Additionally, self-insuring allows small businesses to avoid premium increases stemming from insurance company overhead such as marketing costs and other fees typically passed along to the consumer.
Most appealing of all, self-insurance offers small employers the flexibility to tailor their plan and benefits to the health and needs of their workforce. If you operate a construction or landscaping company, for example, you may want to provide more coverage for injuries or chiropractic care. Or if you have a younger workforce, you may want more robust maternity care in your benefits package. Got lots of smokers in your office? You can structure your plan to offer more rigorous incentives to stop smoking than a traditional plan would allow.
Is Self-Insurance Right for Your Business?
Though self-insurance can help you sidestep many of the restrictions and costs of group plans, it comes with another layer of management and can be financially and legally risky, particularly if you struggle with cash flow.
You’ll need to make sure you’ve got the bandwidth and expertise to properly implement and manage the plan in accordance with medical privacy laws and the financial resources to absorb the cost overruns that will inevitably occur.
If you run a small shop, your best bet is to consult a health benefits broker to help you draft the right plan and find a third-party administrator (TPA) to help you operate and oversee it. A TPA can help you establish a network of doctors and hospitals for your plan, collect premiums from employees via payroll deductions, process claims, prepare monthly reports on how your plan is progressing, and handle other administrative duties.
Self-insurance will still require oversight on your part and the purchase of stop-loss insurance to limit your financial liability and cover exorbitant claims that can swamp your business. This type of policy is issued annually without a guaranteed renewal, so if your healthcare costs rise unexpectedly, you could face a higher premium the next time around or a policy cancelation.
How can you determine if self-insurance is right for you? “If you have a diversified and relatively healthy workforce, lots of growth potential and the resources to take on the liability of self-insurance, it could be a great avenue for helping you reduce healthcare expenses over time,” says Lisa McMurtry, director of benefits for XMI.
On the other hand, if your cash flow fluctuates often, your workforce is older or more susceptible to chronic disease, or the upfront costs and administrative tasks of self-insurance deter you, you may want to stick with a traditional plan or explore a partially self-funded option, which many larger insurers now provide.
Interested in exploring self-insurance for your business? Trust the experts at XMI to help guide you to the best decision. Call us at 615-248-9255 or email firstname.lastname@example.org.