Self-insurance for medical benefits is sometimes seen as a step into the unknown. After all, companies are taking on more risk, and the potential for catastrophic medical costs can intimidate some business owners. But many experts say that the potential cost savings outweigh the risk. And with each passing year, more information is available on how companies can best manage that risk—ensuring that employers aren't simply taking a leap of faith.

Financial risk is the big factor in whether a company self-insures or not. There's little argument about costs—self-insurance is less expensive and allows employers to customize plans more easily. It is also less heavily regulated.

But with self-insurance, companies take on more risk. This can be mitigated somewhat by stop-loss insurance, which does not insure individual employees, but rather provides insurance for any unexpectedly high medical costs the company's plan may have to pay. After meeting a deductible, the company's stop-loss plan will pay costs over that deductible amount.

Self-insurance has been popular for some time with larger companies; more than 80 percent of companies with 500 or more employees have self-insured plans, according to the U.S. Department of Health and Human Services. But smaller businesses self-insure at a much lower rate; HHS estimates that fewer than 30 percent of businesses with 100 to 499 employees self-insure.

But many in the industry say they're seeing steady growth in the rate of medium-sized and smaller-sized businesses that self-insure. “We have definitely seen more interest in self-funded plans, particularly in the smaller end of the market,” says Karin James, an assistant vice president of U.S. stop-loss operations at Sun Life Financial. James says that companies that had previously just explored the idea of self-insurance—and the stop-loss plans that come with it—are more likely to take the plunge these days. “Over the last two to three years, there's been a difference between shoppers and buyers,” she says. “We are now seeing more employers who are definitely interested in buying.”

Risk remains a concern, and very small businesses probably will continue to stick with fully-insured products. But broker David Contorno, president and CEO of Lake Norman Benefits, says that with the proper mix of insurance and stop-loss to protect the employer, self-insured options can work for almost any company. “What self-insured plans let you do is dial up or dial down the level of risk you're comfortable with,” he says. “My opinion is that you are no more or no less at risk being self-insured, if the plan is properly designed and set up.”

Several factors drive the surge in self-insurance

The growth of self-insurance is due to a number of reasons, industry insiders say. The Affordable Care Act increased the regulatory burden on insurance in general, but some exemptions for self-insurance plans have been attractive to employers. An improving economy has given companies more confidence in their overall financial health. And innovation in the plans themselves has reduced the risk for medium and small companies.

“I think the ACA is certainly part of it,” says Michael Fry, executive vice president of the Benefits Division for Symetra Financial Corporation. “Some of the changes that went into place were less onerous on a self-funded plan versus a fully insured plan.” Fry adds that rising health care costs also play a role. “With health reform and rising health care costs, we are seeing more—and smaller—employers evaluate and seriously consider self-funding their employee benefits plan, versus a fully–insured option.”

Others are more cautious when it comes to pinpointing the causes of the move to self-insurance. “It's not obvious to me that macro economic trends affect employer decisions to self-insure, but I do believe that disruptions in the health care marketplace caused in part by the ACA certainly have had an effect,” says Mike Ferguson, president and CEO of the Self-Insurance Institute of America. “I think employers see self-insurance as an opportunity to better control the health care experience for their workers, as opposed to relying on traditional insurance carriers or dropping coverage altogether.”

And there have been innovations such as level-funding, a self-insured approach that works more like a fully-insured plan on the employer side, while still allowing for cost savings and plans tailored to the business' work force. “Level-funded plans look and feel like a fully-insured plan from a cash-flow perspective,” says Contorno.

In general, though, there is agreement that the upsides of self-insured plans have become clearer over time to employers of all sizes. “I think part of the reason for growth has to do with education or the learning curve,” James says. “Companies are getting a sense of comfort in regards to the challenges and responsibilities. They're seeing other companies of their size succeeding [with self-insured plans].”

The role of brokers

There is also evidence of growing support among brokers when it comes to promoting self-insured plans to medium and small employers.

“Brokers are becoming more educated,” Contorno says. “As an industry, we're starting to embrace [self-insurance] more.”

“So many agents and brokers rely on commissions, which are best delivered through a fully insured vehicle,” says Michael Turpin, executive vice president and managing consultant at USI Insurance Services. The fully-insured product could be described as the easiest—if not always the best—option for brokers and clients alike. For companies who don't want to deal with the details of insurance, Turpin says a fully insured plan is one less thing to think about. “The fully-insured option may look safer; you have a more predictable expenditure—even if you're over-paying.”

But for both brokers and employers, the increased emphasis on transparency and continuing pressure to hold down costs are beginning to have an effect.

According to Ferguson, more brokers are talking about self-insurance because “their clients have been demanding options in the traditional insurance marketplace. Compensation arrangements have become more creative to encourage brokers to ensure that self-insurance options are presented to their clients,” he says.

For his part, Contorno describes presenting a more complete set of options as an increasingly necessary step, as the brokerage world sees more consolidation and stiffer competition. “If you're not learning this, you're going to be out of the business pretty soon,” he says. By offering a self-insured option, “you can have a serious impact on rates. It brings a lot more opportunity to the broker to have a positive impact on a client's financial situation.”

Finding a good match

Putting together a successful self-insured plan requires more than just cost savings. Several experts warn that if the medical insurer and stop-loss insurer are not on the same page, disputes over claims can be a major problem. “It's really important that your stop-loss insurer gets along with the underlying medical carrier,” says Turpin. “Increasingly, we're seeing stop-loss carriers questioning claims.”

James, whose company sells stop-loss insurance, agrees that these disputes happen. “It's very important to work with a reputable stop-loss carrier,” she says. “The employer should ask questions like, 'Is the stop loss carrier willing to mirror the plan document?' When a stop-loss carrier mirrors the underlying plan document, you have better cohesion and virtually eliminate any gaps in coverage between the plan document and the stop loss policy.”

Fry says employers and brokers must carefully review definitions and exclusions in a plan to ensure there are no conflicts. “The relationship between the employer, their broker, and the stop-loss carrier is essential to the success of any self-funded insurance plan,” he says.

“The potential of having these conflicts is very real. Brokers can avoid these situations by ensuring that the employer plan document and stop loss policy align, and by building relationships with trusted partners—administrators and stop-loss carriers—who are looking at the business with a long-term view.”

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