Self-funded insurance can offer big savings for companies

Nov. 01--For even the smallest businesses, pledging to pay workers' medical bills straight from company funds can be a $1 million risk -- a high-stakes bet that might pad or prune the balance sheet.

But the self-funded insurance gamble once reserved for large organizations is appearing more lucrative to small and mid-size employers, many of whom will probably sign on next year to try throttling higher costs under the federal Affordable Care Act, benefits consultants say. An announcement last month that the City of Pittsburgh will self-insure more than 3,000 workers and retirees put a spotlight on the idea in Western Pennsylvania.

"There's a definite subset savings of money when you go self-funded. That's clear," said Rick Galardini, CEO at JRG Advisors benefits consulting firm based in Wexford.

He estimated some companies might shave more than 10 percent from projected health insurance expenses by choosing the self-funded approach -- in which they cover medical claims themselves -- instead of a fully insured set-up. The fully insured method leaves the bulk of risk with health insurers, which pay the claims in exchange for premiums and other fees.

Consultants and insurers said companies with as few as 25 to 50 workers are exploring self-funded programs and could make that switch by October 2016, when some fully insured plans grandfathered under the health law would need to comply and meet a new variety of minimum standards, including coverage for substance abuse care and medical laboratory services.

Those fully insured plans also face regulations and taxes that can amount to more than 3.5 percent of premiums, according to the Brookings Institution in Washington, D.C. Employers can bypass many of those blanket requirements and customize their coverage plans by flipping to self-funding, Mr. Galardini said.

Benefiting from large numbers

Still, analysts at two Washington, D.C.-based research groups said it's too soon to say whether the health law will push companies away from fully insured plans. Self-funding has gained favor with employers at least since the late 1990s, although most of that growth emerged from large organizations with at least 1,000 workers each, according to the Employee Benefit Research Institute.

The institute reported 58 percent of workers with health coverage were in self-insured plans as of 2013, up from 41 percent in 1998. About 65 percent of firms with at least 50 workers offered at least one self-insured plan, while 13 percent of smaller firms did so, the institute noted.

Big organizations benefit from large numbers, said Paul Fronstin, director of the health research and education program at the institute. "They basically act like their own insurance company when they self-insure. When you're large, you can do that. When you're small, you can't. Or it's much harder to do."

While sizable employers with self-funded coverage often rely on insurers to administer benefit plans and process claims, the employers can pay the claims themselves because they spread the financial risk over large pools of enrollees.

The risk can be steeper for small organizations because they have fewer participants paying in, which can leave a company with more modest reserves to cover rare, expensive medical cases.

"You start getting down into employers of 50 employees, 100 employees -- they have to protect themselves from large claims. If they get a $1 million claim, that can be catastrophic to that organization," said Anthony Benevento, a senior vice president at Downtown-based insurer Highmark Inc.

Mitigating risk

The City of Pittsburgh and other self-insured employers have mitigated that hazard through an extra policy known as stop-loss coverage, an insurer-provided plan that caps an organization's medical payouts at a pre-set figure. Mayor Bill Peduto's administration announced in October that the city would return to a self-funded approach for roughly 3,700 workers and retirees, a move forecast to prevent about $7 million in additional expenses in 2016.

Health spending will still increase for the city, just not as much as it would have without self-funded insurance, said Sam Ashbaugh, director of the city's Office of Management and Budget. It wasn't immediately clear last week how much of the savings -- if any -- might stem from nuances under the health law.

"This is not just about how much we spend on health care. From the mayor's perspective, it's how healthy are our employees?" said Mr. Ashbaugh.

He said the city will double an incentive to encourage workers to undergo a biometric screening and wellness profile, including height and weight measurements, that promote better health and lower costs.

Self-insurance can make it easier for employers to analyze such incentives, health care usage rates and other data to fine-tune their coverage plans, said Jessica Brooks, president and CEO of the Pittsburgh Business Group on Health. She said some sectors, including public entities and manufacturers, have begun looking more closely at the approach.

At Highmark, Mr. Benevento said employers with around 200 to 1,000 workers are weighing the self-funding option, long a standard for companies with more than 2,000 employees. He said Highmark, the largest health insurer in Pennsylvania, does not try to steer customers one way or another.

"We try to give them all the information to make the right decision they need as the employer. From our perspective, we are happy to provide them with either fully insured or self-funded," Mr. Benevento said.

Either way, analysts said insurance enrollees are unlikely to see little practical difference between a self-funded policy and a similar one that's fully insured.

A self-funded plan generally drops conventional premiums but replaces them with other participation fees that may carry the "premium" label, they said.

"Everyone should at least be evaluating that option," Mrs. Brooks said.

Adam Smeltz: [email protected], 412-263-2625 or on Twitter @asmeltz.

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