NORTH BAY — As employers continue to grapple with ever-increasing health care costs — with or without federal health care reform — those with fewer than 100 employees are increasingly looking for affordable options, with the idea of partial self-funding gaining traction in the past few years, insurance experts said.
Many large, Fortune 1000 companies already self-insure their employee benefits, and the concept is far from new. But the option for smaller groups has received more attention lately, and brokers in the North Bay said they’ve seen an uptick in inquiries about partial self-funding models as means of creating a bit more flexibility in an otherwise inflexible, tightening marketplace.
John Nacol, chief executive officer of Santa Rosa-based Redwood Health Services, which specializes in benefit plans that involve partial self-funding, said the increase in attention by employers dates back to well before discussions of health care reform took shape.
“We’ve had a lot of business over the last 10 years, with small employers wanting to self fund a portion of their benefits,” he said. “I think the biggest thing is it gives employers more transparency. I would say we’re seeing more and more employers do it annually, probably about an 8 percent increase in interest.”
And interest from employers has accelerated over the past two years, as the Affordable Care Act of 2010 forced escalating health care costs to the center of the national discourse and to the top of every employers’ mind.
“I’d say in the last couple of years it’s become more prevalent,” said Chris Reiter, vice president of employee benefits for Woodruff Sawyer & Company in Novato. “Health care reform had something to do with it just because employers are looking for a bit more flexibility.”
Victor McKnight, a principal with Edgewood Partners Insurance Company in Petuluma, agreed.
“We’re seeing more interest in it,” he said.
For smaller employers, a partially self-funded model would typically augment, rather than completely replace, a product by some of the large insurance carriers, Mr. Reiter and Mr. McKnight said. A company with thousands of employees can more easily take on the risk of being self-insured because they have a much larger pool to spread that risk. A smaller employer, however, would need to determine if they would benefit from essentially going it alone in terms of their risk pool, Mr. McKnight said.
A smaller employer is “never going to completely self-insure,” Mr. McKnight said. “But they can partner with an insurance company to take on added risk from some premium savings in the long term. Getting out of the general pool and standing alone can be a very good thing.”
Companies that are comparatively young — a tech start-up, for instance — might determine that other, less healthier companies within its policy are responsible for the annual premium hikes that nearly no employer has averted. Likewise if a company has a strong wellness culture and has fewer claims than another that may be more lax.
“A company would only want to do this if they feel they’re better than the risk pool,” Mr. Reiter said. “If they’re an older group, they’re probably going to want to stay with traditional insurance. If you’re a younger company, it can oftentimes be a really good solution. When you’re a good risk and in that pool, you’re basically subsidizing that risk.”
Mr. McKnight echoed that notion, noting that employers with 100 or fewer employees are put into a modified community rating.
“Everybody will be pooled together,” he said. “If you feel like you’re a better risk than a typical employer, that’s a bad deal because you’re subsidizing the other employers.”
A typical, partially self-funded plan would likely involve a carrier, such a Blue Cross, covering hospitalizations and other major medical issues, while the self-funded portion might cover doctors visits and prescription drugs.
There are additional tax and regulatory benefits, as well, said Mr. Nacol.
“The carriers don’t give claims experience, so an employer really isn’t seeing what the claims usage is. All they see is premiums,” he said. “That’s something we provide. It gives them a sense of how the medical expenses are being utilized and gives them the ability to design a plan that fits the needs of employees.”
Additionally, Mr. Nacol said, self-funded plans typically fall under the purview of the Employee Retirement Security Act, or ERISA, which is overseen by the Department of Labor. The act does not require any employer to have a pension plan, instead only requiring that such plans regularly provide participants with information on the plan, including features and funding, set minimum standards, benefit accrual and funding and other information.
“It’s done under a health reimbursement arrangement,” Mr. Nacol said. “This is really a federal program that can reside in any state. That’s one of the beauties of it.”
Because it’s federal and not the state of California, an employer can likely be exempted from state mandates, such as the recent California mandate that insurance plans cover autism and other mental health care.
“There’s less regulation when you’re self-funded,” Mr. Reiter said. “Health care reform did mandate a lot of the same things, but there’s still less regulation when you’re partially self-funded.”
While partial self-funding can be beneficial, there is an inherent level of risk — if an employer has more claims than they anticipated, it will come at their expense, Mr. McKnight and Mr, Reiter said. Accordingly, plan design needs to take into account that risk so as not to have too big of an impact.
“It’s all about risk tolerance,” Mr. Reiter said. “In taking on a little more risk, you can potentially save a lot.”
Mr. McKnight and Mr. Reiter said that risk can be mitigated by capping how much the self-funded portion would cover, or a stop-loss element.
While health care reform has played a part in sparking interesting on self-funding among employers — and while it hangs in the balance of the U.S. Supreme Court — employers will likely continue to seek alternatives on health plans as costs continue to rise.
“Employers are going to continue to look for ways to keep employees covered at the most efficient rate, regardless of whether the ACA will continue to hold,” Mr. McKnight said.
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