An alternative title to this article might also be “why certain employers should not self-fund their insurance plans.” When companies of a larger size first explore self-funding their health insurance plans, it appears to be an easy financial decision; yet making the change requires overcoming a number of hurdles. (For the reasons why an employer should self-fund its health plan, see an earlier post here Four Reasons to Self-Fund Your Benefits Now). This article will illustrate the obstacles, both systemic and external, that inhibit employers from self-funding their health insurance benefits, and illustrate thoughts about overcoming these obstacles.
First, it’s easy. Fully insuring a population with health insurance is extremely simple, just buy a pre-packaged plan from a broker and it will cover the population. Select a few coverage items from a list, such as the deductible, and it is finished until renewal. Just remember that when large employers with relatively average-health populations (or better) are fully insured, they are probably overpaying (potentially significantly) for this ease.
Second, it’s predictable (in 12 month segments). An employer buying a fully insured health plan knows exactly what it will cost each month of the year, no matter how many surprises come or operations occur. This is a short term predictability, however, because the prices change every 12 months at renewal.
Third, fully insuring is an excellent choice for unhealthy populations. Although the majority of benefits strategies hinge on employers being able to manage the risk of their own populations, sometimes the situation is beyond saving. If the population of employees is aging, obese, and/or chronically ill, the claims utilization may be quite high. This can be so extreme that if the employer were paying the claims it would be far worse than having the population be part of a large risk pool, where the insurance company takes the losses instead of the employer.
Fourth, it works best for large populations. There is no rule that says a company must have “X” number of employees to make the leap to self-funding its employees. The idea is, however, that the larger a population, the more it is able to balance risk across it. Hence, if only 10 employees are on a plan, a single big accident could drive losses greater than a decade of premiums. If the plan has 1,000 employees, the likelihood of a single incident driving huge losses declines dramatically. Recent articles have indicated that more and more, companies with fewer than 50 employees are making the jump to self-funding their insurance plans because of anticipated cost increases due to ACA, especially for employers with healthy populations.
Fifth, it can be hard to get stop loss insurance. When a company wants to self-fund its benefits plan, it needs to purchase stop-loss insurance to provide a backstop against catastrophic claims. These stop-loss carriers need to have claims data and totals so they can price the stop loss insurance accordingly (e.g. a young, healthy population needs a low price, an old, chronically ill population should have a higher price). The stop loss carrier is not gauging the elderly and sick, it just needs to price the insurance properly so it can stay in business. Without any data (which will be very hard to get from the insurance company) the stop loss insurance will price the insurance higher in order to be cautious and make up for the business risk of taking a gamble. There are many ways to get around this hurdle, from buying stop loss from a general agent who specializes in fully insured conversions to doing a semi-self-funded policy with the carrier. See this post How to Get Stop Loss Insurance if You are Fully Insured for details.
Sixth, insurance companies make more money on fully insured plans. By some estimates it requires 3-5 self-funded health insurance plans to earn the same money for an insurance company as a single fully insured plan. Because of this, there is a strong financial disincentive for insurance companies to have your plan be self insured.
Seventh, insurance companies pay more commission to the broker on fully insured plans. Not all brokers work on commission; some work for a flat, transparent fee or a monthly subscription, or hourly. However, a large preponderance of health insurance brokers are paid by commissions from carriers. These commissions are materially higher if the broker has an employer group on a fully insured plan than they are on a self-funded plan. Most brokers will still do what is in the best interest of the client, but if the client doesn’t ask to be self-funded, it’s not a wonder that the broker may not push for it: more work, less pay.
Self-funding an employee population is the right answer for over 90% of large employers, and 60% of all employees in the United States. Nevertheless, there are still tens of thousands of businesses on fully insured plans who could reap major savings by making the switch. Doing so is a long term commitment, and will require some work to get the benefits, but the effort in many cases is well worth it.
 Thomas, Katie. “Self Insured Complicate Health Deal.” New York Times. February 15, 2012