When Michael Turpin was a top insurance executive, he understood that the more comprehensive coverage his company sold customers, the more profit his business would make.
Self-insurance is common among large companies and rare among small ones. Midsized businesses are the ones that should reconsider their options, he says.
“Insurance can cost close to $10,000 per employee per year,” Turpin says, “so 100 employees cost as much as $1 million a year. Self-insurance can save 12 percent, or $120,000, which can be better used to hire more employees or grow the business.”
Risk vs. reward
Self-insurance, at its heart, is a matter of risk vs. reward.
“There are two ways to finance insurance and health care,” he says. “One is to transfer risk to a third party in the form of insurance, and the other is to retain risk by self-insuring. The question is how much of the risk you want to retain and how much you want to transfer.”
The Employee Retirement Income Security Act of 1974 permits companies to save money by bypassing state legislation and design benefit plans tailored for their staff, according to Self-Insured Plans LLC. This is achieved by setting up trusts that are managed by companies known as Third Party Administrators. They administer the trusts, arrange cost agreements with health care providers and pay claims.
Self-insured businesses purchase catastrophic policies in case any individual claim exceeds an acceptable amount. There also is an aggregate amount in an event where total clams exceed the agreed-upon amount.
Only about 26 percent of employers with between 100 and 499 employees self-insure, compared with more than 82 percent of employers with 500 or more employees, according to data from the U.S. Department of Health and Human Services. The risk level is simply too great for most small businesses.
“If an employer has fewer than 50 employees, less than 5 percent self-insure,” Turpin says. “Workforces from 50 to 100 still are not big enough that you can predict the risk. One major claim can cause problems. It's like trying to self-insure your car, where you can be accident-free for four years and then crash your car in the fifth year.”
As the size of a business grows, the rewards begin to outweigh the risks. “At around 300 employees, I would suggest that fortune favors the bold,” he says.
The most obvious benefits — saving up to 12 percent on insurance costs — are obvious. A closer look reveals other advantages. Turpin has no agenda against insurance brokers, but his background taught him that some costs can be obscured.
“There is much more transparency in self-insurance,” he says. “For example, I have to wonder why if I am paying $3 million for insurance, $150,000 goes to my broker.”
Self-insurance peels back the hard numbers.
“Because self-insurance allows an employer to break out virtually every component of their health care claims and administrative expenses,” Turpin says, “it also enables them to hold every provider accountable for their ability to achieve better outcomes, whether it's more effective service, improved employee engagement or lower medical cost trends.”
Again, he draws upon his own experience. “As a CEO, we didn't hide one big Easter egg but instead hid about 15 different nickels, dimes and pennies,” he says.
There also is less regulatory burden.
Under the Patient Protection and Affordable Care Act, self-insured plans are exempt from the excise tax on health insurance premiums, community rating on premiums and mandates under essential health benefit rules. Plans also are exempt from the greater regulation insurers face regarding minimum-loss ratios and annual rate increase review.
Pros and cons
Although it sounds like something worth considering, Turpin has heard all of the standard objections.
“Brokers will say you are taking on a lot more risk for a minimal amount of savings, that you are too small to do it, that there is too much liability at the end of the day,” he says. “They use a quoted maximum I call the `black swan’, which is where every employee files the maximum claims. They will tell you not to take on that risk for $100 to save $20.”
Also, he points out that the typical savings would enable midsized businesses to hire several new employees, one of which could handle internal administration in just part of his or her time. However, he quickly adds that self-insurance is not for everyone. Evaluation requires the expertise of a good accountant as much as an insurance broker.
“Before self-insuring, an employer needs a feasibility study using its claims experience and projections,” he says. “An employer also needs to review provider network discounts to ascertain the subtle differences between each insurer-based network, as well as independent third-party administrator-based networks. Employers also need to understand the nuances of provider contracting.”
At the very least, it's worthwhile for midsized businesses to ask their brokers some penetrating questions. “When comparing brokers, ask how many of their clients are self-insured,” Turpin said. “If they say zero, it should be a red flag.”
In today's insurance environment, he believes midsized companies need to keep their options open.
“In a time of fragile economic recovery, it's important for midsized employers to protect their assets, including their people and their bottom lines,” Turpin says. “The first step mid-market employers must take to get their health care costs under control is to make sure they understand their risk-financing options.”
Asking the right questions
Brokers and third-party administrators (TPAs) are compensated to provide information as well as insurance products. Michael Turpin, executive vice president of USI Insurance Services in Briarcliff Manor, New York, recommends asking the following questions.
What is the average size client that you serve? What percentage of your clients is self-insured? Ask for three references of self-insured clients of comparable size.
What resources do you have to ensure my claim and reserve projections are accurate?
What clinical resources do you have to evaluate our specific claims and help make recommendations on reducing modifiable risks?
What forecasting tools do you use to help us understand future claims trends?
Describe how you would assess the TPA or self-insured administrator's performance for claims payment accuracy, discounts, impact of clinical programs, fraud, etc.?
If claims administrator is not a national carrier but a third-party administrator, how do your discounts compare to that of national carriers?
What kind of performance guarantees will you offer to guarantee you can deliver single-digit medical trends (or lower)?
Will you pay for a third-party audit to be provided each year to assess your performance against our agreed performance standards?