Self-insurance rates are surging as more and more companies decide that the benefits of a self-funded health plan outweigh the potential risks and disadvantages. But despite its growing popularity, self-insurance isn’t always the right choice for every company. If your business is thinking of moving to a self-funded health plan, here are some important points to understand and consider carefully before making a decision.
Is self-insurance right for your company?
How do you know if a self-funded health plan will be a good fit for your company? Answering the following questions can help.
What does your claims history look like?—To appreciate how self-insurance could benefit your company in the future, it’s important to fully understand how your current insurance situation has been working out for you. Take a look at your claims history over the past few years, paying particular attention to how many large claims (over $50,000 or $100,000, for example) have been made. Then, do the math, modeling out your historical claims to see what the comparable costs would have been had you been self-insured. Remember to keep in mind the general rule of thumb: a high claims year tends to occur once every five years.
What is your tolerance for risk?—It’s important to note that self-insurance does carry a higher level of risk than fully funded plans typically do. This shouldn’t stop your company from choosing self-insurance, but it does mean that you should realistically assess your tolerance for risk and your ability to cope with higher-than-expected claims costs. For example, if it’s sometimes a struggle for you to make payroll, or if you typically experience cash flow shortages throughout the year, a self-funded plan, with its inconsistent and unpredictable costs, may not be right for you.
Can you manage the additional administrative burden?—As well as assuming risk with a self-funded plan, your company will also be assuming the responsibility for services and duties that would otherwise be provided by an insurer. This means that you will either need to be prepared to manage additional administrative duties yourself or, as is more typically the case, contract a third-party administrator (see more on this below), which involves an additional cost. It’s also important to know that some of your responsibilities, such as legal and fiduciary accountability, cannot be contracted away.
What you’ll need to do if you choose self-insurance
If your company does decide to pursue a self-funded plan, be sure you understand the steps involved in creating such a plan. These include:
Securing stop-loss coverage—Stop-loss coverage is vital in helping self-insured companies mitigate the risk of any unexpectedly high medical costs. Under a stop-loss plan, the company pays claims costs up to a set deductible; costs beyond that are covered by the stop-loss insurance. Factors considered in securing stop-loss coverage include the size of your company and the nature of its business, your location, your financial resources and cash flow, your prior claims experience, and your risk tolerance. Choosing a reputable stop-loss carrier is important, as problems such as the questioning of claims can arise when stop-loss carriers are not on the same page as the underlying medical carrier.
Preparing a health benefit plan document—As the sponsor of your self-insured health plan, your company will be responsible for both the content and the formal adoption of the written plan document, which is a requirement under the Employee Retirement Income Security Act (ERISA). This document lays out all the provisions and terms of the plan your company is offering, including details on eligibility, coverage, and termination. Self-insured companies can choose to draft their own document or use a template document provided by a contracted third-party administrator. In either case, it will be important for your company to engage experienced benefits counsel during the process of creating the plan; because your company, as the plan sponsor, is legally responsible for the plan’s compliance with necessary legal requirements, document language and formal adoption must be handled correctly to avoid legal difficulties down the road.
Contracting a third-party administrator (TPA)—Few self-insured companies want to take on the administration of a health plan on their own. A TPA administers the plan on behalf on an employer, assuming responsibilities such as maintaining proper funding to pay claims (and pay them promptly), as well as compiling claim information and other necessary data for the plan itself, the stop-loss carrier, and any required government reports. A TPA may also be in charge of billing and collection of premiums or administrative fees for the plan. Given the scope of these responsibilities, it’s clear that the choice of TPA is critical to the success of a self-insured plan; in choosing your TPA, your company should be sure to set clear criteria and carry out a detailed review and selection process.