What It (Really) Means to be Fully Insured vs. Self-Insured

Health insurance costs are rising at alarming rates. But the good news is that you actually have more options than you may think when it comes to offering health insurance to your employees. To start, it’s important to wrap your head around the difference between fully insured vs. self-insured health plans.

Once you begin to dig in, you’ll realize that there are several ways you can save your company money, while continuing to provide great — and in some cases, better — health care benefits to your employees. Doing so involves becoming your own insurance carrier to an extent — but don’t worry, self insurance is much less scary than you might think, and we’re here to guide you through the process of selecting the option that works best for you.

Most people don’t really understand what it means to be ‘fully insured,’ even though the term is thrown around often. Essentially, though, it’s used to refer to the more traditional insurance route in which your company pays a premium to the insurance carrier.

In this scenario, your premium rates are fixed for a given year, based on how many employees are enrolled in the plan each month. But your rates are not guaranteed after this time period is over, and you have little insight into how your plan might change year-to-year; not knowing what is driving claims can lead to an out of the blue 20%+ increase upon renewal. More, fully insured plans are often inflexible, so you have little control over plan design.

Self-insurance is becoming more and more attractive to a smaller business — even those that only have twenty employees — because over the long-term, self-insuring can save you money — sometimes, a significant amount. If you’re a company with fewer than 1,000 employees, you can be self-insured, but many companies don’t even know that this option is out there for them, or are afraid that it’s too risky.

For years, bigger companies (with over 500 employees) have been self-insured. In fact, nearly 84% of companies with more than 500 employees are self-insured. But recently, smaller companies are starting to realize the benefits of taking this route, too. Among those with 100-499 employees, about 25% of these companies are already self-insured and these numbers are growing. The reason is that self-insurance can be a more affordable option. The introduction of the Affordable Care Act brought with it a tax on group health insurance that increased many plan premiums, and experts project that these increases will only continue to rise.

With insurance costs rising, many companies are starting to look for alternative options so they can control costs while maintaining coverage. So if you haven’t considered self insurance before, now’s the time to explore your options.

In a self-insurance scenario, you can choose to fund your employees’ health care through a variety of funding strategies, including: level funding, joining a captive, self-insuring against a deductible, and fully self-insuring. You can also join a PEO*, though generally speaking, we wouldn’t recommend that option for most companies as it tends to be more expensive because of the service costs for HR outsourcing, and doesn’t offer you more than a captive plan would.

Let’s dive deeper into the four primary ways you can self-insure and save your company money:

Level-funding is a form of self insuring in which you pay a Third Party Administrator (TPA) a set amount every month to cover claims and administration, while also getting stop-loss insurance to cover anything above your expected claims. It’s a great option for employers who want a way to guarantee monthly expenses so they don’t get hit with fluctuation in claims.

A captive is essentially a type of insurance company that’s made up of members (non-insurance companies) that take on and divide the risk among its owners. It’s a mutually beneficial arrangement, but in order to join one, you’d need to find companies willing to form one with you, or accept you into their arrangement. This option is popular in the P&C world and is growing a lot in healthcare.

A lesser-known option that can be quite appealing is self-insuring against a deductible. Here’s how it works: let’s say you are 35 person company and your medical premiums are costing you $12,000 per year, per employee. In this example, your deductible is $500 per year, per employee. Let’s say you can get a high deductible plan ($4,000 deductible), and your premiums come down to $6,000 / year. In this scenario, you’d essentially save yourself $6,000 / employee on premiums for a given year. Now, you can tell your employees that you’ll cover $3,500 of their deductible in a health reimbursement account. You still might pay a max of $3,500. But the truth is that most employees will not use the deductible. So the chances that you’ll save money are pretty good. By going this route, you’d still pay less than the $12,000 you’d otherwise be responsible for if you chose the option described earlier.

In addition to the above-mentioned options, you could completely self-insure. Typically, this option is more attractive to much larger companies that are able to manage their own health plan. If you’re a 60-100 person company, you don’t want to deal with fluctuations of cash flow, so if you want to go completely self-insured, you will need some intermediate period during which you are offering some form of insurance. Luckily, you can continue to use level funding or use a captive during this time, which can put you in the position to gather claims data over a few years and then evaluate complete self-insure down the road.

Of course, choosing one of these options can save you money, but it’s not something anyone can guarantee. Depending on the risk of your group, some companies might actually end up paying more when they self insure.

Regardless, you still stand to gain a lot by going the self-insurance route; notably, self-insurance offers you control and visibility into future costs. When you’re opting into a fully insured plan, you have very little say over what will happen to it year over year. But with these forms of self insurance, you’ll get access to aggregate claims data to give you a much clearer picture of what your costs might be like next year. On top of that, any preventive wellness initiatives you put in place will benefit you more directly when you’re implementing them yourself.

The great thing about self-insurance is that to your employees, insurance coverage looks and feels exactly the same; they still get an insurance card, and access to a big name networks from Aetna, Cigna, or other major carriers. And if you fear a catastrophic event, there’s even more good news that should calm your nerves: purchasing stop-loss insurance protects you from incurring astronomical fees.

Ultimately, self-insuring isn’t as risky as you might think — and it can be a great option for your business. But, as with any business decision, you’ll want to carefully weigh your pros and cons with an expert. Understanding your business’s cash flow, employee needs, and demographics can certainly help guide you.

Need help deciding whether self-insuring is a viable option for your company? Our advisor partners do this every day, we’d love to chat and help you understand the best options for you.

*A PEO (or professional employer organization) is a company that takes on the role of a co-employer with it’s customers’ employees. When it comes to providing employee benefits, payroll, workers compensation, and more employees are technically employed by the PEO, not your company. This option tends to be more expensive for most companies above 15-20 employees, so unless your company is very small we don’t usually recommend it.

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Source: Julien Emery