Myth #1: Self-funding is too risky for small employers.
Self-insurance is not widespread among small employers; just 12% of those with 3 to 199 employees self-fund their health plans, according to the 2007 Kaiser Family Foundation Survey of Employer Health Plans. That's a shame, some experts say.
"The myth that small businesses should not self-insure may be the biggest one of all," says Carl Mowrey of SMART Business Advisory and Consulting LLC, a benefits and compensation firm.
"If you have 750 or more employees, self-insuring with stop-loss coverage is a slam-dunk, unless there are extenuating issues. However, I've had employers as small as 50 people self-insure. You have to look at your demographics and the health of your workers to determine the kinds of risks you'll be taking and design a plan that will protect you," he says.
"The conventional wisdom among agents and brokers is that you need at least 200 employees to self-insure," says Curtis Donley, president of Donley & Company, Inc., a third-party administrator and plan consulting firm. "I've also heard that self-insuring with fewer than 100 employees is pushing the envelope. We've found just the opposite - self-insuring is an extremely viable alternative for small groups. We routinely self-fund groups of 25 and up. Self-funding helps small employers gain the flexibility that only the larger employers get in the fully-insured market."
Of course, small employers must find a stop-loss insurer that will take on the risk they're unwilling or unable to assume. That wasn't always easy in the past.
"In recent years, however, the stop-loss market has opened up to small groups. I know of two that will go as low as 15 lives," Donley says.
Myth #2: Self-funding makes health care costs too unpredictable.
With a fully insured plan, employers know what they must pay over a specified time period. With self-insurance, claims, and costs, go up and down from year to year, which can make budgeting difficult. A self-insured employer therefore must have the financial resources, or cash flow, to meet its obligations.
"For most self-funded groups, 60% to 70% of the cost of the program is claims, and claims are extremely volatile," says Donley. "Most employers just pay claims out of their general assets. We set up VEBA trusts for smaller groups that let them hold reserves in good years so they can draw down when claims are higher. This smoothes out their experience."
"With fully funded insurance, you're paying for the carrier's marketing, their risks charge and also [a] hefty amount for profit," observes Mowrey. "I've heard self-insurance described as a not-for-profit health plan. You may often save 10% to15% off what [you] otherwise would pay."
Myth #3: If you have a fully insured plan, and it's running well, you will save money by self-funding.
Maybe not, especially if you're a small or midsize organization and you want to stay with the same carrier.
Because insurers typically make their biggest underwriting profits in the middle market, carriers usually aren't eager to switch fully-funded clients to a self-funded plan, explains Robert M. DiMase, vice president of finance and treasurer with Sentinel Financial Group, a financial services and benefits firm. "So they often will quote unattractive self-insurance rates to those with 50 to 500 lives," he says.
DiMase advises shopping around; competing carriers may offer a better price. But if you want to stay with the same provider network, it might be smartest to stay with your fully funded plan.
Myth #4: Self-funded plans are more restrictive than fully insured plans.
In fact, the Employee Retirement Income Security Act of 1974 exempts self-funded plans from state insurance laws, including reserve requirements, mandated benefits, premium taxes, and consumer protection regulations. Employers that self insure do have to comply with federal laws, including ERISA, the Health Insurance Portability and Accountability Act, Consolidated Omnibus Budget Reconciliation Act, the Americans with Disabilities Act, the Pregnancy Discrimination Act, the Age Discrimination in Employment Act, the Civil Rights Act and various budget reconciliation acts, such as the Tax Equity and Fiscal Responsibility Act, Deficit Reduction Act and Economic Recovery Tax Act.
"With self-insurance, you have a lot more freedom to design a plan that is not subject to state mandates [requiring certain benefits]," says Mowrey. "I did a study for one employer that showed state mandates added about 10% to the cost of a fully funded versus a self-insured plan. While you may want to have some mandated benefits, you don't necessarily need them all. When you're self-insured, you can pick and choose."
DiMase estimates that state mandates add 5% to 7% to a carrier's premium.
"You have to understand what benefits you are cutting out to save that premium, though," he cautions. "It may be that you still want to offer mandated benefits to be a competitive employer."
Because an employer makes its own decisions on what benefits to include, it can move more quickly to take advantage of new, cost-saving opportunities, such as medical tourism, suggests Rudy Rupak, president and founder of Planet Hospital, an international PPO network with providers in 13 countries.
"It's a myth that medical tourism isn't for self-insured employers," he says, adding that non-U.S. doctors offer high-quality, lower-priced services, are often trained in this country and carry malpractice insurance.
Myth #5: Health benefits available in self-funded plans are not as good as those in fully insured plans.
The quality of benefits in self-funded plans is not inferior and may even be better, self-insurance advocates maintain. Major insurers provide the same network to self-insured clients as to insured.
"We put in a lot of self-insured plans where benefits are much richer than typical insurance plans," says Mowrey.
"We combine these benefits with more aggressive features to keep the cost down, such as strong disease management and wellness programs that you may not see in the fully insured environment."
"When we set up a self-funded program," says Donley, "we typically see a dramatic increase in employee satisfaction. There are fewer complaints and issues. Most employers would pay a little more to improve employee satisfaction with their plan."
Myth #6: When you are self-insured, your insurance carrier has to guarantee your renewal.
If you believe this, you may be in for a rude - and expensive - awakening.
"We've seen where a self-insured company's claims experience was so poor that they weren't offered a renewal," says DiMase. "Needless to say, when you're in that position, the alternatives aren't very attractive."
"You need to know that this is a risk going in and ask your carrier if there is a guaranteed renewability feature in the self-insurance contract," he adds.
Myth #7: Self-insurance puts the burden on the employer.
There is a perception that when an organization self-insures, it in essence becomes the insurance carrier, explains Donley.
"The fear is that self-insuring will take up a lot of HR's time and will shift liability for things like COBRA and HIPAA to the employer. We haven't found this to be the case at all. The TPA administering the plan knows that if he doesn't do a good job, he can be replaced without disturbing the plan at all. So there's an incentive to provide good service every day."
What self-insurance does is give employers control over an expense that they want to oversee, he asserts.
"Health insurance is probably the biggest check, after payroll, that an employer writes. So employers want to be intimately involved in keeping track of costs and keeping them down. It's part of operating their business," he adds.
