What About A ‘Partially’ Self-Insured Health Plan?
If you associate self-insured health plans with big, public companies with a few thousand employees, you might be surprised to learn that small- to mid-sized businesses can benefit from specific types of self-insured plans too.
The traditional model in self-insured health insurance is that the employer pays health care costs up to a certain dollar amount for each employee before a stop-loss insurance policy kicks in to pay the rest. A stop-loss policy is typically designed to pay claims that exceed a specific amount of catastrophic medical claims for particular employees. For instance, a company might pay for all medical bills up to $100,000 per employee, and then the stop-loss insurance would pay on any employee medical bills that exceed that $100,000.
As you can see, with the traditional model, self-insurance only makes sense if you could spread out the risk of those few employees who might have substantial claims throughout the rest of the employees. For that to work, you need many employees – 200 employees is a good number. With a self-insured plan, an employer chooses to pay for individual health claims out-of-pocket instead of a monthly fixed premium to a health insurance carrier. This can actually allow employers to save a lot of money on insurance premiums and costs, but it also exposes the company to more risk if there are more claims to pay than expected. Employees still pay the employer for insurance premiums – that money is just going to the employer as the actual insurer. The strategy is to make enough money in employer-side premium savings, and the premium amounts paid in by employees, to cover the cost of medical expenses.
While some employers use the traditional self-insured option described above, there are now options for smaller companies to reap the benefits of self-insured plans at a much lower risk – one of which is a partially self-insured health plan.
With a partially self-insured plan, your company obtains traditional insurance coverage (what you have in place right now, for example). Your company then raises the deductible on the group health insurance plan to the maximum amount they can. For example, if you have a $2,000 deductible on your plan right now, you might raise that to a $7,000 deductible. The company then self-insures the difference.
How Does It Work?
Employees are responsible for the first $2,000 of health care costs; then the company pays for the additional $5,000 of the deductible if needed. The insurance the company would pay anything over that $7,000 for each employee as normal. This is a much smaller risk, per employee, than the typical, fully self-insured arrangement – only $5,000 per employee instead of $100,000. While the savings are also less, they can still add up!
The Upside
Oftentimes, companies save a significant amount of money with these plans. With a higher deductible, the overall premium for the insurance is lower. The employee is getting the same sort of deductible they’re used to (in this example, $2,000) and pays the same portion of the premium, and the employer pays less of the premium but assumes some risk.
The truth is, many employees will not even burn through the first $2,000 of the deductible. You know (or can find out) about your company’s overall claims experience, to give you an idea of how many employees might exceed this threshold.
The company then harvests all of the premium savings, net of any amount they have to pay between $2,000 and $7,000. This can give the company valuable cash reserves to put into new machinery or expansions. Or you can invest the money to have it available for high-claim years.
Think of regular insurance like interest – you kind of know what you are getting (or in this case, paying). Self-insured plans are like stocks – you will have some really good years, some really bad years and a lot in between.
The Downside
The biggest issue is the risk. If there are high claims, your company has to foot the bill until its portion is fulfilled. Think of regular insurance like interest – you kind of know what you are getting (or in this case, paying). Self-insured plans are like stocks – you will have some really good years, some really bad years and a lot in between. Overall, though, you tend to win in the long run. After all, insurance companies that take on the same risk are fine!
Keep in mind that these self-insured plans (partial or traditional) are not plans you can just buy off the shelf. Each plan must be customized and often needs a third-party administrator. Companies considering this option also need to perform due diligence and a cost/benefit analysis and should consider hiring professionals to help. Furthermore, with both fully self-insured plans and partially self-insured plans, companies must file annual 1095s for employees (if they are not already).
While it does take some time and effort to put the partially self-insured option into place, your business can certainly benefit. If you have questions, we are here to help guide you to a decision that best suits your company. Contact a member of our Rea & Associates team today.
By Lisa Beamer, CPA (New Philadelphia office)