It’s hard not to notice the escalating cost of health insurance in America. In 2015, health care spending was 17.8 percent of gross domestic product, and it’s expected to reach 20 percent by 2025. As a result, premiums are on the rise. Average family premiums have increased nearly 3 percent since 2015.
Some businesses can’t absorb such increases, and self-insurance is one way to approach the problem. It’s not the solution for every business, but combined with purchasing stop-loss policies, which reimburse employers when medical expenses exceed a pre-determined level, it has enabled some cost cutting.
For example, since transitioning to self-insurance four years ago, Cleveland-based printed-communications company Admiral Products has cut its health costs by about $150,000 a year. And a Maryland real estate broker with 46 employees reported that its coverage expenses dropped 15 percent after it decided to self-fund. Both firms switched after their insurers demanded double-digit premium increases.
Ohio-based consultancy Spooner, a larger firm that employs 130 people, reduced annual health spending by $400,000 after self-insuring.
Given the higher level of engagement when employers choose this option, it can empower them to focus more on employees’ health. Many businesses have turned to wellness programs such as smoking cessation, on-site clinics and indoor walking paths to help encourage healthy lifestyles. Disease-management programs have been shown to reduce hospital visits and lower health costs. This emphasis on health supports the employees and helps businesses lower health care costs.
Self-insurance has the added benefit of allowing the employer to design plans that work specifically for their employees, with the potential to provide more flexibility than conventional health insurance.
The transition to self-insurance isn’t challenging. There’s no application process involved — just a unilateral decision that self-insurance is a good fit for the business. To make that choice, business owners typically work with qualified business advisers and conduct a feasibility review. If the assessment indicates that the company can and should self-insure, the owners connect with a third-party administrator. With this external help, self-insuring companies can set up their insurance plans, identify other business partners and establish ongoing management services.
Once self-insured, the processing of a participant’s claim almost exactly mirrors traditional insurance. The participant goes to the doctor and pays a copay. The key difference emerges when payment time comes: Rather than contacting an insurance company, doctors bill the appropriate employer instead.
Mike Ferguson is president and CEO of the Self-Insurance Institute of America.