More Employers See Self-Insurance as Lower-Cost Option
YOUNGSTOWN, Ohio — With the end approaching of the Affordable Care Act’s “grandmother” policy, business owners can expect to see their premiums rise as they make the shift toward act-compliant plans.
Since enactment, with fluid definitions and deadlines deferred but the end of grandmothering – which allowed small businesses to keep their non-ACA insurance plans – insurance brokers have been trying to find ways to lower their clients’ costs.
“What we’re gearing up for is more and more employers … looking for alternatives,” says The Tartan Companies President Ron Blasko.
And an alternative increasingly discussed with employers, he says, is self-insurance. Once reserved primarily for the largest companies that chose to pay their employees’ medical bills, no matter how high, self-insurance has gone through a metamorphosis and become an option for small businesses. Tartan and one of its subsidiaries, Tartan Insurance Agency, have developed self-insurance plans for businesses with as few as 10 employees.
“If you read marketing material, you’ll see stuff about knowledge of where your money is going and control over benefits. But now, more than ever, cost is driving the decisions,” says Tartan Insurance President Josh White.
In a standard fully insured policy, the costs that determine a premium include what the insurance provider assumes it will need to cover a client’s claims, its administration and overhead, taxes and profit, Blasko explains. Self-insurance reduces those costs and in some cases eliminates them.
Rather than an insurance company factoring in its profits, he continues, self-insurers keep what they don’t pay out in claims. If a company pays an annual premium of $100,000 and the insurer – in this case the company – pays $80,000 in claims, it keeps the difference.
Administrative costs remain and are “usually the same for self-insurance” because companies are hired to take care of the paperwork rather than entire policies, unless a business has someone on staff well-versed in insurance and the accompanying regulations.
Blasko notes that insurance companies, including Anthem and Medical Mutual of Ohio, often serve as “administrative service only contractors,” or as an ASO. Another option is for employers to use a third-party administrator.
“An owner decides he wants to do self-insurance. Does he want a $500 deductible or a $1,000 one? He doesn’t know, so he hires a consultant,” Blasko says. “That’s where we come in.”
Making this kind of insurance viable for small companies is the creation of stop-loss coverage. Businesses of any size – Tartan has created policies for companies with 1,200 employees and quoted policies for those with 10 – can self-insure to a certain amount. If a claim exceeds that amount, insurance from a provider kicks in.
“They’re self-insured up to the first $150,000. Above that, the [stop-loss insurance] kicks in,” Blasko says of the largest self-insured client. “It won’t be a $100,000 risk for someone with 10 employees. Maybe it’s $40,000. By having stop-loss at lower thresholds, the self-insured market can be brought to smaller employers.”
Even with that coverage, it’s still the large employer, defined as an enterprise with more than 100 employees, that most often uses self-insurance. At Tartan Insurance, White says, it’s part of the discussion with companies that employ fewer than 50, even if they don’t end up adopting it.
“Self-insured have stayed self-insured and fully insured groups have stayed fully insured. There’s a comfort level and, other times, financial restrictions,” he says. “They can budget a set amount that lends itself to fully insured, whereas self-insured plans fluctuate. Not all companies can handle that.”
The newest type of coverage for self-insurers is what’s known as level-funding. Employers pay upfront to cover everything. If claims for the year come in below what it paid, the business could be eligible for a refund. If the amount is higher, the insurance company pays for the claims.
What draws most business owners in and gets them to change, beyond the lower cost, is the flexibility. The large employer Blasko mentions offers three plans, each at a different price and with very different coverage. And owners can look at their employee bases and choose what’s right for them, rather than stick with prepackaged plans from insurance companies.
“If an employer feels orange juice has miraculous health power, we can write it into a plan that an employee can turn in orange juice box tops for a deduction,” he says. “I’m being facetious, but it’s that flexible.”
Perhaps the largest downside of self-insurance, both Blasko and White acknowledge, is the risk. Stop-loss coverage mitigates some of that, but it’s still there. If a claim exceeds what a company can afford, it still must be paid.
“The biggest advantage of fully insured to an employer is that there’s no risk. You’re just paying premium. As long as you pay that, your claim can be zero or it can be $5 million,” Blasko says. “There’s a known upfront cost.”
White adds, “There is risk in [self-insurance], but it’s the opportunity to reduce cost that drives employers to self-insurance.”
Copyright 2022 The Business Journal, Youngstown, Ohio.