April 2006

Does it make sense for a small- to medium-sized business to self insure?

Although self-insuring traditionally has appealed to very large firms that can cap health costs by distributing health risks over thousands of employees, there may be some advantages to small- to medium-sized businesses as well.

How Self Insurance Works

With traditional healthcare insurance, an employer pays premiums to an insurance company and the insurer accepts the financial risks of providing healthcare coverage. With self-insurance - or self-funded insurance - your company accepts the risk of paying all or a portion of your employees' medical expenses. Your company puts aside the funds - either in a trust or in a simple reserve account. Your company also must purchase catastrophic or chronic illness co-insurance coverage - called a stop-loss policy. This coverage protects you from being wiped out financially in case an employee incurs catastrophic medical expenses.

You're gambling that your employees' actual medical expenses, plus the cost of the stop loss coverage, will be less than the cost of paying traditional insurance premiums. What's more, your employees can help pay for the costs of a self-insured plan, just like they do with regular healthcare insurance. You can have them pay a co-payment on services rendered and a portion of the cost of the stop-loss coverage.

The plan can be administered directly by your company, or you can hire a third-party administrator to run it. Even though it might cost more than doing it yourself, it's probably wiser to hire a third-party administrator to handle things like maintaining confidentiality, processing and auditing claims, complying with government regulations, and overseeing the quality of medical care.

Advantages

A big “plus” of self-insuring has been the ability to reduce health benefits spending by eliminating the administrative costs and profits that commercial insurers build into their premiums. Another big plus - one that's currently convincing employers to self-insure - is freedom from state-mandated benefits and taxes. While states can regulate insurance companies - requiring them to cover certain high cost services such as in-vitro fertilization, mental healthcare, and acupuncture, and to pay certain taxes — health plans that are created and funded by employers are governed by federal laws only. Due to the Employee Retirement Income Security Act 1974 (ERISA), self-insured plans generally are exempt from the state-mandated benefits, taxes, and other potentially expensive state regulations that can significantly increase the cost of providing health insurance benefits.

This means that in some ways, self-insuring might make sense for you, because it would:

• Allow you to choose exactly what benefits you want - and can afford - to provide;
• Free you from having to pay state-imposed taxes on insurance premiums;
• Improve your cash flow, which commercial insurance carriers would tie up in the form of advance premium payments;
• Facilitate your access to medical claims data, which would be in-house, helping you to monitor and control healthcare costs; and
• Pay you some interest from the fund you create to pay health claims.
• Give you the chance to adopt your own managed care strategies and to negotiate your own discounts with healthcare providers, as long as you have negotiating experience and ability.

Disadvantages

There are, of course, a number of disadvantages of self-insuring, including the unpredictable cost of employees' healthcare. Not only is it difficult to predict what your company's healthcare costs will be, but also those costs are rising daily. One year of exorbitant medical expenses could ruin even a well-designed self-insurance plan, and possibly your company's future. To protect against this type of disaster, you should inquire about stop-loss insurance to protect against these risks.

So, if you are considering self-insuring, be sure to calculate, after figuring in your stop loss insurance coverage, whether you can bounce back after a bad year. You also may want to consider other possible drawbacks, such as:

• Lacking the human resources expertise needed to handle medical claims and ultimately paying a third party administrator (TPA) to do the administrative work typically done by insurance companies;
• The difficulty of keeping employees' medical claims - which would be reviewed in-house — confidential;
• Devoting costly time — more than you may have — to developing a health plan, explaining it to employees, and paying claims;
• Being held legally liable for refusing to pay for experimental treatments or other care that you determine is inappropriate but that an employee (and a court) says is necessary; and
• Being required to provide continued health coverage for an employee who has been terminated or who has had to leave your place of business for other qualifying reasons, under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA).

Do I have to follow both state health coverage continuation laws and COBRA?

Many states have heath insurance continuation laws similar to the federal Consolidated Omnibus Budget Reconciliation Act (COBRA). These state laws generally apply only to employers with commercially insured health plans; for employers with self-insured group health plans subject to the Employee Retirement Income Security Act, ERISA preempts state regulation of these plans.

Employers with commercially insured plans generally must comply with both federal and state laws governing continuation coverage. However, if the state law conflicts with COBRA or has terms less generous toward beneficiaries, the federal law overrides state requirements. State continuation coverage laws usually have similar provisions governing qualifying events, but might apply to small employers with commercial insurance plans who otherwise are exempt from the federal law. For example, California has a law covering employers otherwise exempt from COBRA and beneficiaries not entitled to coverage under COBRA. Most state-required continuation coverage periods are less extensive than required by federal law; however, if a state requires a longer period of continuation coverage than COBRA, the longer state period applies.

COBRA coverage generally runs concurrently with state continuation coverage, provided the scope of coverage required by state law is identical to that equired by COBRA. However, certain states specifically require offering state-mandated continuation coverage only after COBRA continuation coverage expires.

Under HIPAA, must I give new hires the same health insurance benefits they had in their old job?

The Health Insurance Portability and Accountability Act (HIPAA) doesn't mandate any particular type of coverage. It doesn't require employers to offer employees benefits they had at a prior job. Instead, HIPAA affords access to health insurance for small firms and self-employed individuals, and coverage for employees or dependents with pre-existing medical conditions after a specified waiting period (usually 12 months). HIPAA doesn't require employers to offer specific benefits, premiums, co-payments, or deductibles. Medical coverage, including eligibility, excluded care, monetary caps, and premiums, are determined by the new employer's medical plan.

If employees or dependents were covered for that condition under a previous employer's health plan, then the amount of coverage time must be deducted from the waiting period in the new plan. For example, if a patient with severe diabetes was covered for treatment for six months in their old job, then they can only be denied coverage for diabetes treatment for six months if they change jobs. However, if the new employer's plan excludes diabetes, and this exclusion doesn't violate state or federal law, then coverage will not be required, even though coverage was provided by the previous employer's plan.