The new year has finally arrived. If your company offers health insurance through one of the nation’s major providers, the new year likely brought with it higher costs across the board. It is an ongoing problem year after year. Health insurance premiums continue to rise right alongside healthcare delivery costs. One way to offer employees health insurance without being subject to drastic annual increases is through self-insuring.
While some companies were struggling to help their employees navigate health insurance options for 2021, self-insuring organizations had little more to do than update workers on changes for the coming year. Many of them were able to offer 2021 plans with more affordable premiums.
Is self-insuring the right option for your business? Perhaps. Just know that it’s not right for every company. Ownership has to have the stomach for, and commitment to, providing quality health insurance that always carries with it the risk of being financially devastating.
Self-Insuring: What It Is
Self-Insuring is the practice of setting money aside to cover future liabilities. In the context of this post, we are referring to self-insuring to cover employee healthcare costs. But it is not limited to that. Companies can self-insure in just about every arena for which they would otherwise purchase insurance.
Self-Insuring for healthcare purposes means setting up a plan to cover employee expenses the same way a health insurance company does. Large corporations may have the financial and HR resources to do everything on their own. Small- and mid-size companies often contract with third-party administrators to establish and administer their health plans.
Self-Insuring Saves Money
One of the most attractive reasons for self-insuring is the financial savings it represents. Right off the top, self-insuring companies do not pay health insurance premium taxes. That’s just the start. They also save money by being able to customize health plans based on their own workforce communities.
Under the traditional health insurance paradigm, premiums are community rated. In other words, health insurance companies look at data from communities that include hundreds of thousands of subscribers and the companies that employ them. This leads to rather generic coverage that leaves people at lower risk paying for those at higher risk.
Self-insuring companies do not have to look at communities outside of their own work forces. This allows them to custom design their health plans to meet only the needs of their community. That ultimately means lower pricing.
Negotiating with Providers
Self-insuring companies also have an opportunity to negotiate directly with healthcare service providers. They can often negotiate lower prices by being willing to offer 100% reimbursement. To a provider, such an arrangement is as good as cash. Most providers are more than willing to work with self-insuring companies simply because it is more financially productive than working with insurance companies.
The Liability Issue
There are, of course, downsides to self-insuring. First and foremost are the administrative hassles. It takes a lot to administer a health insurance plan in the modern healthcare environment. Above and beyond administration is the liability issue.
Accepting the liability of a self-insured healthcare plan means accepting the risk that significant illnesses among even a small number of employees could put a company in financial jeopardy. To prevent this, Dallas-based BenefitMall says self-insuring companies tend to purchase stop-loss insurance that caps their risks. Stop loss insurance eats into some of the savings of self-insuring, but not so much as to make self-insuring a bad idea.
Self-insuring is one way to contain the costs of employee benefits. It is not the best option for every company, but it is very good for some.