Employers these days are looking at ways to control health carecosts. They hear health care is an important benefit to theiremployees, but face the task of figuring out how to offer thebenefit without exposing themselves to claims that could destroytheir bottom lines or even their companies. 

So it would seem counterintuitive for employers—especiallysmall to mid-size organizations—to assume more risk in today'smarketplace. But that's exactly what's happening thanks toself-funding, or self-insurance. 

Industry veterans report that over the past decade, more andmore small to mid-size employers have turned to self-funding as away to control costs, offer valuable health care benefits and keepemployees productive. 

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“It started off slow; it was a new concept. But now that healthcare costs keep going up, people are looking for alternative waysto finance health care,” says Jim Carlson, president of HCFS ofWisconsin in Pewaukee, Wis. “We've seen more interest than in thepast. While they've been out there for a decade, each year it getsmore and more attractive.”

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As a sign of self-funding's potential, Carlson's company alongwith its partner, The INC Group, plans to expand to eight to 12more states in the next year.

The difference

Self-funding differs from fully insured health insurance in anumber of ways.

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In a self-funding arrangement, an employer basically agrees tocover all claims in the health care plan.

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Employees still pay premiums and deductibles, but the employercovers claims up to a certain level called an aggregate attachmentpoint, which are based on the total number of expected claims overa year. The attachment point essentially sets the employer'smaximum exposure to costs. When claims exceed the attachment point,employers purchase stop-loss policies that reimburse the employerfor costs associated with catastrophic claims or high levels ofclaim activity. 

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“When an employer goes self-insured, it is assuming 100 percentof its exposure to the benefits plan,” says Kurt Ridder of SpectrumUnderwriting Managers, Inc., of Indianapolis, Ind. “No matter whatthe stop-loss is, the claim's responsibility lies with that plan.The employer is on the hook. What the smart employer or third-partyadministrator does is buy the stop-loss policy to cover.”

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To construct the plan, employers should perform a health riskassessment to build an appropriate benefits plan design. Employersalso will need to engage a third-party administrator to help managethe plan's administration. 

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The main cost savings of self-funded results from the plandesign. Instead of buying an entire menu of health care servicesand claims management from a fully insured plan, employers canpurchase coverage a la carte, meaning they can buy only coveragethat meets their employee needs. Very small employers, however,should expect some limitations in the self-funded planofferings.

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 Obvious candidates for converting to self-funded areemployers that don't see fluctuations in their health care costsover a period of years. 

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“Stability is key,” Carlson says. “If every year you're going upand down on your health care costs, self-funding is probably notfor you. But as long as you're fairly consistent over time, it's agood program.”

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While self-funding may not work for every employer, brokersshouldn't expect doors to be closed when discussing the optionswith small and mid-size employers. 

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In many cases, they'll face a potential client used to a littleuncertainty in their business. 

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“You'll find that small employers are entrepreneurial by nature.That's been our experience, you've got people that are willing totake some risk, most of those people took big risks to get theirbusiness started. They're not strangers to laying it all on theline,” Ridder says. 

The drivers

Unsurprisingly, the Patient Protection and Affordable Care Actof 2010 has played a major role in self-funding'sgrowth. 

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The act established minimum-loss ratios for health insurancecompanies of 85 percent for large groups and 80 percent forindividual and small group markets. Large health insurancecompanies passed increases on to their clients while they figuredout new profit models under PPACA. Small- and mid-size employerslooking for different ways to lower the cost of their healthinsurance offerings began considering self-funding. 

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“The wording in the act relative to the minimum-loss ratios hascreated interest in alternatives to fully insured plans,” saysStephen Rasnick, president of Self Insured Plans of Naples, Fla.“It has created an enormous amount of interest inself-funding.”

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The key to self-funding is the stop-loss policy. While that typeof coverage has been around for some time, PPACA contributed to anenvironment where stop-loss insurers could offer the coverage toorganizations with fewer and fewer employees.  

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“Historically, there have never really been stop-loss policiesthat were well-suited for a smaller market,” Rasnick says. “Thedynamics of the marketplace have created opportunities foremployers with 15-20 employees. There are a lot of employers thatwanted to self-fund but couldn't do it because stop-loss policieswere developed for employers with 75-100 employees. And now they'redown to 15-20 employees and they're even down to fiveemployees.”

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Another driver in self-funding area has been a long-standingfrustration by some employers with fully insured plans. 

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“So many employers are frustrated that they don't know whythey're getting the increases they are,” says Pavlina Sustr, anaccount executive with IMA, Inc., in Denver. “The trend is 12percent and they're looking at their company and seeing healthypeople and asking, 'Why am I getting increases every year?' Withself-funded, you can see what's going on.”

The benefits

Though self-funding exposes employers to risk, the rightstrategy and patience also bring rewards. 

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Sustr says employers looking to go self-funded should beprepared to make a multi-year commitment to the strategy to fullyrealize its benefits. 

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“Self-funding is not a one-year cost savings, it's a long-termstrategy … and that is the key thing to understand—it's not aone-year fix,” Sustr says. “Overall within three years, it willsave money.” 

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Employers with stable health costs make for good candidates togo self-insured. Even if that's the case, industry sources say,employers should perform a health-risk assessment. The assessmentwill help employers see if there is cost stability and select acoverage package that lowers their cost. 

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“We try to encourage employers that No. 1, data is king. If theycan get the right data and have low turnover, we can design acustom-fitted plan that will help them meet and achieve theirbudget and benefit level to produce longevity for employees,” saysTerry Chesser, principal of U.S. Advisors, Inc., of Brentwood,Tenn.

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In addition to information gleaned from a health-riskassessment, employers will be able to obtain information that canhelp them make decisions on where to best allocate their resourcesin real-time. 

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And more information means better businessdecisions. 

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Many plans allow employers to pool money for a “rainy” day.Employers who save money in unpaid claims during a certain monthcan even apply it to future costs. And some employers choose towrite it down as a cost savings, which helps the bottom line. It'sall in the employer's hands. 

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At IMA, Sustr says, some of her company's self-funded plansallow employees who quit smoking or lose weight to save money ontheir monthly premiums—and that can help an employee's bottomline.

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Employers can impact costs in other ways, too. Thanks toself-funded plans, employers have instituted wellness programs tohelp the employees lead healthier lifestyles. 

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“What's happened is that smaller employers have the ability toconsider creative ways to impact cost,” Chesser says. “You havemore wellness programs and increased benefits designs to help levelthe playing field. You have more support services where theemployer was being sure everyone was getting the attention andmedical treatment they need so that catastrophic cases could beminimized. We all know that 20 percent of employees use 80 percentof the benefits. What you try to do is take those 20 percent andincentivize them to change habits. In the past, you'd say, 'Youshouldn't smoke,' and 'They'd go so what?' Now, they say, 'We'llreward you with a $50 gift certificate if you quit for six monthsand $250 if you're off for a year.'”

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Across the country, wellness programs have evolved to offersmoking cessation courses, nutritional help and exercise programsamong other offerings.  

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Chesser says some small employers are also providing morecost-effective health care in different ways under self-fundedplans. Some employers provide staff nurses or doctors on-site. Astaff doctor can take care of on-the-job injuries, which saves oncosts associated with an emergency room visit. Staff nurses canadminister shots or provide guidance on when to see adoctor. 

The regulations

As more and more employers embrace self-funded plans, there'sthe possibility of more and more regulation. 

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In April, the state of California amended a bill to effectivelyend stop-loss policies for organizations with less than 50employees, according to the Self-Insurance Institute of America. Inthat case, the state says that stop-loss companies are providinghealth coverage for individuals and dependents. That's not whatstop-loss is. Stop-loss covers the employer in cases ofcatastrophic claims or high levels of activity, not individual planparticipants.

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Industry sources say there's a high-degree of misunderstandingabout self-funding on most levels of government. The key is to keepabreast of the regulatory environment and know what's coming, theysay. 

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“There's a lot coming down the pike—much of it at the statelevel,” Ridder says. “The regulators have a hard time understandingthe whole concept of self-insurance and how it plays out. They'retrying to get their hands around it.”

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The best way for brokers to stay abreast of the changes inself-funding is to keep up with self-funded industry tradegroups. 

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Regulatory updates and other news that affects the industry canbe found at websites for the Self Insurance Institute of Americaand the Society of Professional BenefitAdministrators. 

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And everyone should be on the look-out for the Supreme Court'sruling on PPACA. Regardless what some pundits say, the rules couldchange all over again. 

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Maybe Chesser has the best advice for small to mid-sizeemployers in this time of new thinking and creativity. “Everyemployer should have a plan A, a plan B, and a Plan C,” hesays. 

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Nathan Solheim is a Denver-area writer. He can be reached [email protected].