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Is Self-Insurance In Your Future?

Originally Published in RMP Advisor, June 2009

by David Edman

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How Self-Insurance Can Boost Your Bottom Line
David Edman, Managing Partner of Risk Management Partners, has over 30 years of experience designing healthcare benefits for companies. Here he details the benefits of self-insurance by answering commonly asked questions.

With Health Insurance Costs Skyrocketing, Are There Alternatives?
Yes, particularly for larger employers. As discussed in prior RMP Advisor issues (see Archives), the American health insurance system is broken. We sometimes ignore fundamental insurance principles such as the “law of large numbers.” The people in a company to be protected from financial loss form a “risk pool,” usually with a combination of “good” risks and “bad” risks. As the size of the pool increases, the predictability of loss is greater and the cost of purchased insurance decreases because of lower risk charges.

How Does Self-Insurance Work?
When you’re a single entity (e.g., an employer) who controls a sufficient number of insureds (e.g., employees) such that financial losses can be accurately predicted, you may not need an insurance company to assume risk for you. Your risk pool is sufficiently large, and losses sufficiently predictable, to allow you to assume some or all of the risk yourself. When you choose not to pay an insurance carrier to assume risks for you and to self-fund the risk yourself, your costs for this insurance program may be substantially reduced.

How Many Employees Must the Company Have in Order to Self-Insure?
 Generally, if you have 500 or more employees, you should give serious consideration to self-insurance. You can do it with fewer employees (depending on the predictability of your losses and your risk tolerance), but self-insurance generally isn’t viable for groups of 200 or fewer employees. On the other hand, its viability is highly probable if you employ 500 or more workers.

Does Being Self-Insured Mean Assuming All the Risk?
 No. Many self-insured employers choose to cap their risk by buying catastrophic or “stop-loss” coverage. In exchange for a premium, a reinsurance carrier will pay individual claims over a certain amount (individual stop loss) or pay for total claims in excess of a certain amount (aggregate stop loss), usually 125% of expected claims.

What Are the Advantages of Self-Insurance for Health Benefits?
 Compared with purchased insurance, self-funding of health benefits provides many plusses, including:

  • lower total costs (e.g., no risk charges)
  • lower administrative charges
  • elimination of most premium taxes
  • exemption from costly state-mandated benefits
  • better cash flow (especially first year)
  • control over plan design
  • improved risk management.

How Can I Learn More?
Many good sources of information about self-insurance are available.

For example, we’ve provided several more links below:

We recommend that you use a qualified consultant or actuary and consult with industry sources such as the Employee Benefits Research Institute (EBRI). Another good source is the Self-Insurance Institute of America (SIIA), where you can find answers to the following questions about self-insured group health plans:

  • What is a self-insured health plan?
  • Why do employers self-fund their health plans?
  • Is self-insurance the best option for every employer?
  • Can self-insured employers protect themselves against unpredicted or catastrophic claims?
  • Who administers claims for self-insured group health plans?
  • What about payroll deductions?
  • What laws regulate self-insured group health plans?

Check out the answers to these questions and contact us for more information. At RMP, we believe that there are better ways to purchase health insurance, and you owe it to your organization and your employees to learn about them. Contact us today!

“Insanity Is Doing the Same Thing Over and Over and Expecting Different Results”
— Albert Einstein