What Is Self-Insurance?
Employers providing health benefits to employees have three basic choices: buying a fully insured plan, self-insuring or offering employees a choice of fully insured and self-insured plans. With an insured plan, the employer pays a flat per-enrollee premium to an insurer that administers the plan and pays claims. Like an insured employer, a self-insured employer has a written plan. However, it pays for its workers’ claims directly as incurred and retains the risk of higher-than-expected claims.
So Why Do Employers Self-Insure?
Self-insurance offers a variety of potential advantages to employers, including:
- Autonomy, control and flexibility of plan design, including exemption from state-mandated benefit requirements;
- Lower administrative costs than a commercial carrier would charge;
- More timely and complete access to data on health claims, which can help employers make more informed decisions about plan design;
- Ease of altering their contract with a third-party administrator (TPA) or stop-loss insurer without affecting employees’ choice of providers;
- Improved cash flow generated by keeping funds in-house until needed for payment of claims; and
- Avoidance of state insurance premium taxes.
State laws that regulate fully insured group plans usually do not apply to self-insured plans. And some provisions of the federal Patient Protection and Affordable Care Act pertain to fully insured plans but not to self-insured plans.
In addition, several provisions of the Affordable Care Act (ACA) that apply to fully insured small group plans (100 or fewer employees) do not affect self-insured plans:
- Community rating. Insurers can vary premiums only according to actuarial value of the plan, geographic region, age, tobacco use and family size. Your group’s health status or actual claims experience will not matter.
- Risk adjustment. The ACA allows the transfer of funds from plans with enrollees having lower than average costs to plans with employees having higher than average costs.
- Plans offered to small groups must cover “essential health benefits” (EHBs). The EHBs include items and services within ten general categories, including prescription drug coverage and mental health and substance-use-disorder services.
Covering the EHBs has made many small group plans more expensive. Large groups, on the other hand, have to meet certain minimum coverage value requirements, but they do not have to cover the essential health benefits. And with community rating and risk adjustment, healthier groups essentially subsidize the cost of covering less-healthy groups. Therefore, if you have a relatively young, healthy group, you may save money by self-insuring.
Self-insurance has potential disadvantages, however. These include:
- Financial risk of unexpectedly large claims;
- Regulatory compliance, which is easier with a fully insured plan;
- Loss of some discounts. Insurers and larger employers have the clout to negotiate discounts with health providers that smaller employers lack.
Most self-insured employers outsource plan administration and claim processing to a third-party administrator. They can also mitigate some of their risk by purchasing stop-loss insurance, which will reimburse a covered employer for claims above a specified dollar level.
Provisions under the ACA allow employers that switch to a self-insured plan to switch back to a fully insured plan at a later date without having to worry about the group or specific individuals being denied coverage for pre-existing conditions. This differs from pre-ACA days, when insurers could refuse to cover groups or individuals within a group based on health status. The ACA also prohibits insurers from charging higher premiums based on the health status of your group or the gender of your employees. It also limits how much premiums can vary based on age.