Steps employers must take to self-insure group health benefits.
Q: What must an employer do to self-insure group health benefits?
A: Self-insurance is a financing technique that has been used for decades to cut insurance costs and manage risk. Originally, it was used by larger companies to manage property, casualty, disability, and workers' compensation risks. More recently, self-insurance of group health risks has become popular. The force driving this popularity is the exploding cost of group health insurance, which grew 131 percent between 1999 and 2009, according to the Kaiser/HRET Employer Health Benefits Survey. Also, the development of group captive vehicles places self-insurance within the reach of much smaller employer groups; how small depends on state law.
In the group health area, self-insurers save costs by shifting the profit earned by insurance carriers to themselves. These employers have greater flexibility in designing their group health plan. For instance, plans can be designed to avoid state mandates. Self-insurers also avoid taxes imposed on fully insured premiums. Perhaps most important, self-insurers have complete transparency with regard to the claims that are driving their costs, enabling them to manage the claims with wellness programs and other plan-design changes.
What is involved in replacing fully insured health plans with self-insurance? Fully insured group plans have four components:
- A claims management department;
- A network of providers;
- A stop-loss policy to handle disastrous claims;
- Insurance for everyday claims, which the carrier takes on. (When an employer decides to self-insure, it takes this final component on as well.)
Replacing the first three components can be daunting. However, the self-insurer's group-benefits consultant lines up all the necessary service providers while ensuring the human resources department's workload isn't seriously affected. In a self-insured plan, third-party administrators replace the insurer's claims department. Some carriers "rent" their networks to self-insurers for a per-capita fee. Others have developed extensive provider networks that compete with carriers' networks. Doctors and other providers typically participate in many networks, which results in significant provider overlap. Still, in the process of identifying a network for the self-insured plan, the employer will want to request a physician-disruption report to anticipate the level of employee satisfaction with the network chosen for the self-insured plan.
A misunderstanding about self-insurance is that the employer is exposed to disastrous losses. This is avoided with the purchase of a stop-loss insurance policy. Health-insurance carriers build stop-loss into their fully insured policies, and self-insuring employers purchase stop-loss policies to protect them from large claims. Stop-loss insurance brings the risk of self-insurance down to levels deemed acceptable by these employers.
Additional components can be added to self-insured group plans, just as they are to fully insured plans. For instance, wellness plans with varying degrees of employee mentoring are commonly added to these plans. Effectively managed wellness plans hold out the hope of controlling growing healthcare costs. As a result, self-insuring employers tend to emphasize wellness.
Self-insurance is typically considered by groups with 500 or more employees, though it has been used by smaller groups. The issue for smaller employers is that for insurance to be actuarially sound, groups must be large enough for the "law of large numbers" to operate. The smaller the group, the less certain its risk management.
Within past years, however, smaller employers have banded together and formed group-owned captive insurance companies to self-insure group-health risks. This enables the group of employers to share its risk across a larger population of employees and achieve more certain risk levels. In some areas, employer groups as small as 10 employees have participated in group-health captives. In other states there are minimum group sizes permitted to purchase stop-loss insurance, effectively setting a minimum employer size to participate in a group captive. In New York, for instance, groups must have more than 50 employees to obtain a stop-loss policy.
Self-insurance of group-health benefits is not for all employers. But employers or employer groups large enough to present a population that yields a high degree of predictability should explore self-insurance as a viable financing alternative to fully insured health plans.
James A. Woehlke is the COO and general counsel of MBL Benefits Consulting Corporation in New York City. Email: [email protected]