Over the last several decades, we’ve had many trends burst onto the scene. Bell-bottoms, tie dye t-shirts, and lava lamps in the 1960s. Disco music, Daisy Duke shorts, and the pet rock in the 1970s. Break dancing, Cabbage Patch dolls, and mullets from the 1980s – you get the picture. While self-insurance is not as fun as some of the fads of prior decades, the fact that it is trending right now is pretty exciting for employers and healthcare insurance professionals like myself.
Employers have self-insured themselves for healthcare costs for many years, but historically it has been a funding mechanism for large employers only.
With the advent of the Affordable Care Act, the trend to self-insure healthcare costs has come down market to smaller employers, prompted by new and creative funding alternatives.
Specifically, insurance carriers and third-party administrators (TPA) have been relaxing historical employer size limitations and have been creating new products for employers with less than 250 employees to self-insure themselves.
The attraction for employers to self-insure its health insurance risk is multiple benefits such as:
- Reduced carrier risk costs
- Premium and other tax avoidance
- ERISA rights to preempt state insurance coverage mandates
- Flexible plan designs
- Low stop loss limits that mitigate large claim risks
- Surpluses remain with employer
- Access to data
- More control over plan strategy and cost control
The number of products for groups of all sizes to self-insure their risk has grown exponentially over the last several years. Here are examples of some of the more common self-insured mechanisms:
- Traditional self-insurance, as noted above, has historically been a large employer opportunity, but most insurance carriers have relaxed eligibility limitations to employers with 100 or more employees. There are many advantages, as well as some risks with this form of self-insurance.
- Captive self-insurance has been available in the P&C insurance market for many years, and recently has become available to employers in the healthcare market. This is a self-insured program in which one group or more groups take on a tolerable amount of risk per covered individual (layer 1), pool funds on their own or with other employers to cover a portion of high cost risks of the group (layer 2), and cede another portion of catastrophic risk to a stop loss carrier (layer 3). This funding alternative is available to any size employer, but it is becoming increasingly popular for groups with employers with 50-250 employees who want the benefits of self-insurance without absorbing the full risk on their own.
- Graded-Funded self-insurance is a newer version of self-insurance. It has most of the typical features of traditional self-insurance, but has a “graded” element for cash flow benefits in the first few months of the contract. This funding mechanism is targeted at employers with 50-250 employees, who are interested in becoming self-insured without the full cash flow liability of traditional self-insurance.
- Level-Funded self-insurance is a newer version of self-insurance. It sometimes is referred to as a baby step to captive, graded, or traditional self-insurance as it looks a lot like a fully-insured contract. The “premium” is level throughout the year and is capped for the year, the stop loss limits are low, the carrier holds the reserve for incurred but not reported (IBNR) claims, and year-end surplus is shared between the employer and carrier/TPA. This funding is also popular with employers with 50-250 employees.
Employers that have been concerned in the past about the risks of self-funding are increasingly considering the above alternatives as a means to manage their health plans and control their healthcare costs. If you are in a position to make decisions relative to your employer’s health insurance plan, make sure your trusted benefits advisor is discussing the self-insured trends as part of your ongoing health plan strategy.