Self-Insurance Plans and Small BusinessesPosted by Adam Andrews on September 9, 2013
If you think health insurance is pricey for individuals, imagine having to pay for an entire company along with your husband’s, wifes’, children’s and other potential dependent’s health insurance. Now let’s talk about pricey. We all know that beginning January of 2015, any company with over 50 employees working full time is required to offer a health care package for its employees. And if you don’t already know about it, I recommend reading this article to help you catch up. Many Americans have mixed feelings about Obamacare’s employer mandate. It is not cheap to provide group health insurance for a company, big or small. Fortunately, not every employer has to go about providing health benefits to their staff in the same way. Yes, you heard me, there are still options available. One that has been of growing interest is a self-funded health care plan (aka “Self-Insurance”).
Commercial vs. Self-Insurance Plans
A commercial group health care plan (or “fully-insured”) is something that a company would purchase through an insurance provider. Just like individual insurance, there is a deductible and a monthly premium to be paid. This is paid for in majority by the employer, with the remaining being paid by the employee. After the deductible has been paid and the premium is in place, the company no longer has to worry about how many doctor visits, hospital visits and prescriptions any of its employees need – that will remain between the employee and the insurance provider.
Self-Insurance, also referred to as “self-funded” insurance, is when the company itself takes responsibility of its employee’s health expenses and pays out-of-pocket for any medical costs as they occur. There is no insurance company involved with this option, no fixed deductibles or premiums set to be paid to the insurance provider. All payments made on the company’s behalf go straight to the hospital, doctor’s office or whoever is responsible for the medical care / billing office.
Where do these “funds” come from, you might ask? Each year the company assesses the likely medical risks and costs for its employees and creates a set payment to come out of each paycheck to contribute to the fund. Typically, the employer would create an official outlined document going over the benefits and charges that are agreed upon by the employee.
Unlike a commercial plan, the components of a self-insured health care package do not come to the company neatly bundled and ready for distribution to qualified employees. They require a bit more paperwork, legal obligations, risk calculating and hassle for an employer to take care of on their own.
Why business are choosing to self-fund their healthcare benefits
Despite the additional headaches, there are a number of reasons why a business would choose to self-insure their company:
- There is no money that needs to be paid upfront before the insurance can kick-in (such as a commercial plans premium). The employer only pays as medical needs occur.
- Instead of picking a “one-size-fits-all” plan, the employer has the opportunity to customize their healthcare to fit the needs of its employees and creates more room for useful wellness programs.
- The employer remains in control of medical expenditures and what they are being applied to.
- And last but not least, because self-insured plans are regulated under the Employee Retirement Income Security Act (ERISA), some requirements of the Affordable Care Act do not apply to employers who choose a self-funded plan.
This last point is a big one at the moment. The new healthcare laws under Obamacare require all fully insured commercial plans to offer a series of essential health benefits, such as mental health, maternal health and prescription drug coverage. For employers that choose the self-insured route, these essential health benefits can be altered and even cut to save costs and/or changed to better fit the needs of its employees.
Is Self- Insurance right for your business?
Not every business would benefit from going about their healthcare plan in this way. A strong candidate for a self-insured plan should have the following qualities:
- A younger workforce. Young people usually come with less medical needs and fewer doctor visits.
- A larger workforce. A higher number of employees provide a more stable calculation of risk, making it easier to predict potential medical costs and spending.
- A strong cash flow. Medical needs can be unpredictable at times; a good candidate for self-insurance has a steady resource for funds in order for it to be a viable option.
This can be a lot of paperwork, legal obligations, risk calculating and hassle for an employer to take care of on their own. Often times, a company using a self-funded plan may outsource their duties as the “plan sponsor” to a third party.
Stop-loss plans are also a popular option when looking into self-insurance. What if a huge medical expense arises unexpectedly that you can’t afford? That’s where the stop-loss plan comes into play. It is an insurance contract for protection against catastrophic claims over a specified dollar amount that stays between the stop-loss carrier and the employer.
How will this affect Obamacare’s employer mandate?
According to AmericanProgress.org, 60% of businesses chose to self-insure their employees in 2012 (which is a huge increase from a report done in 2000 showing only 33% of private companies were using self-funding insurance plans). The majority of these employers however, are large companies with 1,000 or more employees. Small businesses have remained at a small percentage because of the financial risk a self-insured plan puts them at. But with the upcoming regulations on employer offered health coverage, it is an option that may move many smaller firms towards a more appealing self-funded option.
With more and more companies leaving behind their insurance providers, premiums could skyrocket resulting in a not so sought after effect for Obamacare. The insurance market needs the young and healthy and the large businesses to help bring costs down and make them more affordable for everyone. But keeping the elderly and sick as the majority using health insurance plans, prices will only continue to go up- also known as the” insurance death spiral.”
Not only could this raise costs, but choosing to self-insure could potentially mean less benefits and fewer protections for the business’s employees. Employers choosing to continue under a self-funded plan do not have to comply with all of the ACA’s new upcoming regulations meaning that those employers don’t have to provide all of the benefits that a fully-covered insurance plan would.
Self-funded insurance plans, although unlikely, could pose a threat to Obamacare’s success if there's a huge influx of participating employers, but the employer mandate also puts businesses between a rock and a hard place. Some businesses feel as if they may not have another choice. If they cannot afford to pay for a fully-insured commercial plan, would they rather face the penalty? Or try and take matters into their own hands with a self-insured plan? Either option could be risky and has high potential to come with unexpected costs that could be detrimental to a small business’ success. The choice isn't easy.
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