Self insurance gone amuck … small employers are barking up the wrong tree for savings

2013

The New York Times is reporting (February 18, 2013) that there is a move among small employers to switch to self-insurance for their employee health benefits. Companies as small as twenty or thirty employees are seeking to avoid some of the Obamacare requirements, mainly essential health benefits. My own conversations with consultants confirms this trend. However, at the same time large employers are considering private health insurance exchanges being set up by several of the major consulting firms. This is a move from self-insurance where most large companies have been for decades to an insured arrangement. Somebody has this backwards.

The Employee Benefits Research Institute reports that in 1998 40.9% of workers with health benefits were in a self-insured plan, by 2011 that number reached 58.5%. Eighty-six percent of workers in firms with 1,000 + employees are self-insured. Even among firms with 50 or more workers the number is 68.5%, 35% for firms with 100-999 employees, but amazingly 10.8% of firms with fewer than 50 employees are self-insured and the number is growing.

From the NYT article:

The Township of Freehold, N.J., made a similar decision in January to gain more control over benefits and costs for its 260 employees. The township, which spends more than $5 million a year on employee health benefits, had been seeing premiums rise 10 percent to 20 percent a year. Under the new arrangement, Peter R. Valesi, the township administrator, said, “We expect to stabilize our rates and keep the money we save, rather than giving it to health insurance companies as profit.”

How accurate this quote is I have no idea, but in any case such a comment reveals a lack of understanding of how health care and health insurance works.

Self-insurance is not the panacea for saving money. The two largest components of premiums are claims and administration. Claims will not decrease with self-insurance. Self-insured plans must hire a third party to process claims and handle all the other paperwork like claim appeals, legal compliance and care management and they must directly or indirectly pay for the management of provider networks. In addition, the smaller the group the greater the risk in self-insuring so to protect the company they must purchase stop loss insurance which may limit total claim liability, high cost individual claims or both. Coincidently, stop loss insurers are among those pushing the move to self-insurance.

There are some immediate short term or one time savings when self-insuring. Small groups may be paying a broker to purchase insurance and they are likely paying premium taxes as well. Both should go away, but represent (or should) a rather small portion of total costs. Replacing these savings will be the cost of stop loss insurance.

There is one other element of premiums that may appear to be a saving, but in reality does not exist and that is some retention (reserves). Built into premiums are amounts intended to pay for claims that may not be known until several months after coverage ends. Let’s say an insured plan terminates its contract on December 31. Who pays the claims that were incurred in the last several months of the year, but may not have been submitted for payment? The previous insurer does and does so from a fund built up for this purpose from the premiums paid by the employer. Just because there is no insurer does not mean this liability goes away. So if an employer counts the lack of this retention as a savings, it is misleading itself.

Here is the bottom line, costs are costs and the idea that self insurance will somehow magically lower those costs is a myth. Once everything is sorted out costs will rise in a self-insured plan just as they do with an insured plan. Small employers who see some salvation or short-term savings in moving away from insurance are kidding themselves and taking greater risk for year to year swings in claims.