By Ron E. Peck, Esq.
Small businesses are educating themselves on their health insurance options—and they’re realizing self-funding may be the way to go. Before assessing self-funded health insurance for your business, you need to understand the two pillars of health insurance: funding and risk.
When most people think of insurance, they’re thinking of “traditional”, fully-funded insurance—where you pay the premium and the carrier takes the risk. This option is great, if the premium is low.
But insurance companies don’t print money. As they cover risky customers—people who incur expenses greater than their premium—they need to increase everyone’s premium to compensate. We all add money to a single risk pool.
With a self-funded or “self-insured” plan, an employer collects “contributions” from participants and puts the money—with the employer’s own contributions—into a trust used to pay the plan members’ medical bills.
Why would an employer self-fund?
- Plan Control: You choose what to cover and exclude.
- Interest and Cash Flow: Funds are in the employer’s hands until they’re needed.
- Federal Preemption and Lower Taxes: The Employee Retirement Income Security Act of 1974 states that a private, self-funded health plan isn’t subject to conflicting state health insurance regulations.
- Data: Employers with self-funded plans can examine claims data, study trends, allocate resources, and form partnerships to address their unique needs.
- Risk Reduction: Reducing risk and costs directly impacts the employer and employees; other populations don’t impact the plan.
Self-funded health plans are growing popular, correlating with rising fully-funded health insurance costs. Many point to state and federal exchanges created under the Affordable Care Act. People with costly pre-existing conditions can’t be denied coverage under the ACA, so they purchase insurance through the exchanges. Insurance companies are limited by law regarding how much premium they can charge these costly enrollees, so they have to compensate by charging healthy policy holders and employers higher premiums.
Many employers have reacted by withdrawing from the fully-funded risk pool—and are self-funding instead. Even if President-elect Trump were to repeal ObamaCare, he may seek to keep the “popular” parts of the law, including extending coverage to people with pre-existing conditions. Thus, it seems—if insurance is called upon to pay for all claims and claimants (regardless of their health)—everyone will foot the bill.
If an employer considers providing robust benefits for minimal cost a top priority, self-funding is a “no brainer,” right? Not exactly. Yes, the steadily increasing cost of fully-funded insurance has led to a rise in self-funding by small and mid-sized employers. Yet, there are risks to self-funding. Among them: the threat of catastrophic claims, inability to fund claims, and new fiduciary responsibilities to plan members.
Self-funding isn’t for everyone. Traditionally, large employers were the only employers self-funding their health plans. Large employers can spread the risk posed by large medical bills across their massive employee population, ensuring they have adequate funds to pay for the occasional catastrophic claim.
Smaller employers may not have the money to pay for a potential catastrophic claim, which is why many have shied away from self-funding for so long. But as the cost of fully-funded insurance increases, it’s pushed some small employers over the edge. The costs are simply too high for some—more small and medium-sized employers are being shoved over the hump, beyond the limits of their risk aversion, and into self-funding.
At the same time, numerous studies over the last decade have analyzed risk-controls small employers can leverage to counter the risk they face—such as implementing wellness programs, smoking cessation efforts, and examining their staff to determine how healthy the population is—and thus, how costly to cover. Nationally, reports have shown an increase in self-funding health plans among small employers (1 to 50 employees), at a rate between five and ten percent. Before ObamaCare, the transition of small businesses to self-funding was closer to one percent.
For those willing to take the plunge, the savings can be substantial. Nearly ten years ago, our own Boston-based firm decided to self-fund our health plan, for less than 60 people at the time. Since then, our costs haven’t increased by more than three percent per-covered life between any two years, and have averaged less than a one percent increase between years across the life of the plan. We spent less in 2016 than in 2015, despite increasing the number of covered lives—resulting in a decrease in healthcare expenses and no increase in employee contributions this year. Compare that to other small Massachusetts employers—seeing an eight percent increase in their expenses, year after year.
Is self-funding the right decision for every small business? No way! But if your staff is relatively healthy and you’re willing to commit time to customizing a plan around your staff’s needs—reacting to the data, avoiding unnecessary expenses, focusing on prevention, and implementing innovative cost-containment services—then perhaps self-funding is the way to preserve your health plan in an otherwise tumultuous era.
Ron E. Peck is senior vice president and general counsel at The Phia Group, LLC.