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As small and midsize employers continue to struggle to manage ever-increasing health insurance costs, business owners are well advised to re-evaluate their plan designs. Since 2005, the average family’s premium has increased over 60%, and the upward trend will likely continue. Employers’ options are shifting more costs to workers, bearing the increasing costs themselves, or a mix of the two.

Faced with this challenge, midsized and smaller companies are increasingly looking to implement a partially or fully self-funded health plan. In a traditional medical plan insurance contract, the employer pays predetermined rates (premiums) to the insurance carrier, and in exchange, the insurance carrier takes on all claims risk for one year. In a self-insured arrangement, the employer, as plan sponsor, hires a company to administer the plan, but the administrator draws on the employer’s general assets to pay the doctors and hospitals.

“Under a self-funded arrangement, there is more risk to the employer of a member having a large claim,” says Karen Regini, vice president at Gorman Insurance Agency, a Connecticut-based brokerage firm. To mitigate this risk, the employer typically purchases stop-loss insurance, she explains. “It’s essential to be protected in the event a policy holder has a serious, long-term health issue.”


There are two major types of stop-loss insurance: specific (or individual) and aggregate. Under the former, once a single member’s claims reach a predetermined annual amount (for example, $50,000 or $100,000), the stop-loss carrier reimburses the employer for the rest of the member’s claims costs. Under aggregate stop-loss policies, the employer is reimbursed for the amount of claims (excluding any that are reimbursed under the specific policy) that exceed a predetermined amount for the year.

Determining which type of stop-loss coverage and what that amount should be is best left to the professionals, Regini says. “There are a lot of considerations that must be looked at including overall health of the policy holders, claims history, cost of the stop-loss policies and appetite for risk of the business.”

Self-funding is not a new idea. In fact, 94% of employers with 5,000 or more workers do it, according to 2017 research by the Kaiser Family Foundation. Among those with 200 to 999 workers, 56% self-fund. It’s far less common where there are fewer than 200 workers, with 17% of such employers self-funding, but that’s up from 12% in 2008, and it continues to rise.

Why are more employers choosing to self-fund? According to Joe Nicoletti, senior manager at New York-based Meridian Benefits Consulting, more small businesses are drawn to the concept of designing and controlling their own health plans. “When you design the plan,” Nicoletti says, “it enables the business to do things like charging smokers considerably more than nonsmokers, implementing wellness programs with incentives for healthy lifestyle decisions and providing strong incentives for plan members to utilize walk-in health clinics instead of ERs for nonemergency matters.”


Another benefit of self-funding, Nicoletti points out, are reduced taxes and fees. States typically tax insurance premiums, he says, but when you self-insure, the majority of those premiums are removed. Moreover, the Affordable Care Act introduced new taxes on insurance carriers, who pass along increased expense to employers. While self-funded plans are subject to some ACA taxes, the tab is less than with an insured plan. Finally, self-insuring removes some carrier risk charges.

There is also increased cost transparency with self-funding. “When receiving a significant health plan increase on a renewal,” Nicoletti notes, “employers often wonder whether it truly is a fair renewal. When you self-insure, you see very clearly where your dollars are spent.”

Given these advantages, why don’t all employers self-insure?

There are several reasons it doesn’t always work, and at the top of the list are certain state-imposed limitations. Some states regulate or disallow sales of stop-loss insurance to smaller groups. For example, a New York state law prohibits the sale of stop-loss insurances to groups of 100 workers or fewer. “If a smaller employer cannot protect itself with stop-loss insurance, self-insurance is just too risky,” Regini says.

Even with the protection of stop-loss insurance, claims still fluctuate, and the fluctuations are more pronounced with smaller groups. A small handful of hospitalizations, or even just one, can impact claims totals, and for some small businesses, the risk is simply too much to stomach.

Lack of claims data can be a challenge. “It’s difficult to assess the viability of self-funding if you cannot access historical claims from your insurance carrier or if the data set is too small to make credible predictions,” Regini says. “Those are common challenges for smaller employers.”

When a company self-insures, it must become much more involved in the health plan, particularly regarding banking arrangements, compliance requirements and managing plan design, and thus the administrative burden becomes greater.


If a business determines it wants to explore self-funding, the usual starting point is to evaluate the claims history. In reviewing claims for the last few years, attention needs to be on whether there have been large claims (say, more than $50,000 or $100,000). “You need to model it out and see what your costs would have been if you had hired a third-party administrator and paid for stop-loss during those years,” Regini advises. She notes that a rule of thumb is that companies can expect to have a high claims year every five years, but it’s advisable to track savings over time.

Every organization’s appetite for risk is different, and this needs to be assessed as well. Health benefits professionals note that if a business lacks strong cash flow or sometimes struggles to make payroll or pay vendors on time, self-funding is probably not a wise option. Regini tells her clients that if they envision being worried about an impending large claim throughout the year, then it’s probably not worth the angst.

As small or midsize companies continue to grapple with health care costs and regulatory requirements, best practices used by larger companies are worth considering. “While self-funding is not necessarily a good fit for every company,” Nicoletti says, “it’s smart to consider it and evaluate the risks versus the rewards in implementing a health plan that works well for both employer and employee.”


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