It’s no secret that healthcare costs are continuing to rise for businesses of all sizes. The average increase in the US in 2018 is expected to be 8.4% but if you’re a smaller firm with 500 or fewer employees you could certainly see a 10-20% increase. Unfortunately, this has become normal. According to SHRM, the majority of businesses with fewer than 500 employees are fully insured with a carrier. In many cases, being fully insured makes a lot of sense but as costs have continued to increase more and more companies have started to look at self- insurance. We think you should too.
Fully Insured vs. Self-Insured
So, what’s the big difference here between these two models. Doesn’t self-insurance just expose me to more risk and fluctuation without a chance of saving me money? Well, no actually.
Fully Insured plans are completely owned by an insurance carrier. There is usually little to no flexibility in terms of plan design, network design or cost control. You leave all of that in the hands of the carrier to manage. In return for that, the carrier is essentially putting your business within their “pool” of other fully insured clients. This protects you from the really bad years which is a good thing. However, when you have a really good year, that savings doesn’t come back to you. It goes to the carrier to help them offset the bad years you previously had or will have in the future.
Self-Insurance works differently. In a nutshell, self-insurance allows you to only pay for the services you and your employees use within a given year. You’re not sharing your risk with other employers to offset the potential for a bad year but you’re also not paying other employers with your money when you have a really good year.
So, at a basic level, fully insured plans provide protection from bad years due to shared risk. But, they provide little upside in the case of a good year. Self-Insured plans provide tremendous upside and savings in your good years but do have some potential for increased costs during bad years.
Protection during the “bad” years
Being self-insured leaves me exposed to paying for really high claims, right? Not if you plan properly. Smaller firms who self-insure always pick up stop loss insurance which protects them from the catastrophic claims or “Shock Claims” that will eventually hit every plan. But, how does it work?
Let’s say you are self-insured and your expected claims for a 50 man company are $600,000 for the year. Everything is going along great and 10 months into the plan year you’ve only spent $200,000 as a group. Then, WHAM! You get hit with a $500,000 claim. You’re now running at a loss. We’ll when you purchase stop loss insurance you’re protected from that overage. In the above scenario you would have had protection for any amount over $600,000 in claims assuming that is how you structured your plan.
Now, you might wonder what happens if that large claims comes in early on in the plan year. Fortunately, smaller businesses can build in options like a monthly aggregate accommodation or “level-funding” your expenses which is limits your exposure on a monthly basis.
Bringing it all together
This can all sound complicated, but we can tell you that the process can be simplified if you work with the right consultant. Not only that, the savings can be almost instantaneous. Self-insured plans eliminate most of the taxes associated with fully insured plans which can save 3% right off the bat. In addition, self-insured plans have the ability to customize their plans to control costs long term. They can look for prescription rebates, partner with provider facilities directly on a lower cost basis, and review their claims like any other business expense to find area’s where performance can be improved. Fully insured plans just do not provide that kind of clarity.
But, I still think I’m too small…
Due to the increased pressure on the market to find lower cost solutions, self-insurance option for small businesses are readily available. Businesses with as few as 10 employees have made the switch successfully and lowered their expenses while improving benefits. These are businesses just like yours; mechanic shops, construction companies, doctors’ offices, business services firms and others all have made the transition successfully.
So, as you come up on renewal this next year, we advise you to consider self-insurance. It may not make sense this year but eventually you will see that it does. Sooner or later, being fully insured may become too expensive. If you move to self-insurance you will be able to lower costs and keep them lower for the long term which allows businesses to keep more money in the operations budget and out of the healthcare budget.