08/ 24/ 2004
by Charles McConnell
Self-funding for group medical coverage began with a few companies in the early 1970s, but they ran into a few problems as the insurance regulators of various states sought to bring these individual plans under state regulation. However, the practice of self-funding received a boost with the passage of the Employee Retirement Income Security Act (ERISA) in 1974. Among ERISA's various provisions are those allowing employers to self-fund -- that is, self-insure -- employee benefits plans. States may not regulate ERISA plans as though they were state-regulated insurance plans. Some states have attacked this premise, both through state regulation and efforts at the federal level to have ERISA changed, but ERISA remains intact concerning self-insurance by individual organizations.
In simplest terms, self-insuring means that the company with the insurance plan, rather than some insurance company, pays the claims directly and assumes the financial risks that accompany any insurance program.
Why consider self-insuring for health care? One principal advantage is that the company is able to control the design of its own plan, to customize the plan's features to best reflect the company's needs. It is a significant consideration for some self-insurers that the state cannot regulate an ERISA plan as insurance and thus cannot mandate that certain specified benefits be included in the plan. A company that is self-insuring can set its own coverage criteria, including what is or is not covered and what levels of deductibles, co-insurance and co-payments are to be applied. (A deductible is that amount the user must spend on some aspect of care before the insurance kicks in; co-insurance is the portion of a particular bill the user must absorb -- 80/20 is fairly common, with insurance covering 80 percent of a hospital bill and the user paying 20 percent; and a co-pay is the user's portion of a service bill, for example a $10 co-pay for a provider visit.) The higher the deductibles, the greater the co-payments; and the greater the user's co-insurance cost, the lower the overall plan's cost will be. A company can design a plan that best fits its workforce. For a young employee group, high deductibles, co-insurance co-payments and thus lower individual costs may be appropriate; for an older employee group, lower out-of-pocket costs and thus higher premium costs may be preferable. Coverage can be designed to best meet the perceived needs of the work force.
Another advantage of self-insurance is the ability to select the company's own plan administrator and designate its own service providers if desired. Also, decision-making and claims processing usually occur faster under a self-insured plan. And there is always the matter of cost and potential savings when compared with purchased insurance; any savings generated by the self-insured plan remain with the company, not with some external insurer.
There are, of course, some disadvantages to self-insuring for health care. For one, there are start-up costs associated with plan design and with setting up plan administration. Overall more management time is consumed by self-insurance than is required to monitor purchased coverage. And, significant for some companies, a poor loss experience cannot be offset by the better experience of other organizations, which might be the case for a company that has bought into a group.
There is also the matter of risk, the degree of probability of loss or the amount of possible loss to the insurer. Consideration of risk brings up a significant potential disadvantage for a small business considering self-insurance for health care: A single catastrophic occurrence, such as a life-altering illness or serious disabling accident, can send the plan's costs through the ceiling and even endanger the company's financial health. As a hedge against this possibility, self-insurers ordinarily opt for re-insurance coverage, which for a reasonable premium, takes over after a designated level of expense has been reached thus protecting against catastrophic loss.
Any company considering self-insurance for health care should begin by securing the advice of a benefits consultant, preferably one that will assess your situation and offer a recommendation without also attempting to sell administrative services. The consultant will analyze your situation, help develop and assess alternative plan designs and compare and contrast these with plans available in your community and suggest whether self-insurance might or might not be appropriate for you.
It's likely that the majority of companies that have self-insured for health care are relatively large, but this doesn't necessarily mean that small-to-mid-size companies cannot benefit as well from this practice. However, self-insurance is not an undertaking to be entered into lightly. Even a well-functioning plan may show no savings for the first year or two because of plan design and other start-up costs. Should you be considering the possibility of self-insurance, begin with an independent assessment of your situation by a professional benefits consultant.
