Businesses cutting rising costs by self-insuring
After years of facing steeply rising health insurance premiums at his family's commercial construction company, Bryan Reiser was surprised to find a plan that cut the business's costs by 25 percent.
“It has worked out well, especially over the last couple of years where the traditional plan costs had skyrocketed,” said Reiser, who manages operations for PBS Cos. in Crete, Ill. “We needed another way.”
That other way for PBS was to self-insure — an alternative way of paying for employee health benefits that for years was available only to the nation's biggest employers. Companies that self-insure cover the cost of all medical claims for their employees rather than paying premiums to insurance companies, which pool funds from many employers to cover workers' health costs.
Typically only the largest employers could afford the risk of self-insuring because one worker coming down with a serious illness could mean huge medical costs that might bankrupt a small company. In exchange for taking that risk, self-insured companies see savings in years when employees don't rack up a lot of medical bills.
Companies that self-insure often pay less because they don't have to pay taxes on premiums or provide all benefits required by states and the federal government.
As health-insurance premiums have risen — especially for small and mid-size employers — more companies are beginning to look at becoming self-insured. Sixty-three percent of covered workers last year were in a self-insured health plan, up from 55 percent a decade earlier, according to the Kaiser Family Foundation, a California-based nonprofit research organization. Much of that growth has come from companies with more than 1,000 employees, but more smaller companies are self-insuring.
“Companies are moving that way because of growing instability in the traditional insurance market,” said Mike Ferguson, CEO of the Self Insurance Institute of America, a Simpsonville, S.C.-based trade association. “It's certain that you're going to get a price hike each year” with traditional health policies.
The average premium for employer-sponsored family coverage was $17,545 a year in 2015, up 53 percent from 10 years earlier, according to Kaiser data. Growing health benefit costs have pushed employers of all sizes to find ways to save money. Companies are passing on more of the costs of health coverage to their workers through higher premium contributions, deductibles and other cost-sharing.
Some large employers have cut deals directly with hospitals for specific procedures. For instance, big box chains WalMart and Lowe's in 2013 agreed to cover the full cost of hip and knee implant surgeries for their 1.5 million employees and their dependents, including travel and lodging expenses, if they had the procedures at one of four major medical centers. According to the Advisory Board, a Washington, D.C., health care consulting firm, WalMart and Lowe's received discounted rates from the hospitals.
But small companies such as PBS, which has 15 employees, don't have enough potential patients to work out deals with medical providers. And PBS couldn't afford to take on all the risk of self-insuring, Reiser said. What the company found was a new type of health coverage — known as level-funded health plans — that is sometimes described as a hybrid between traditional fully insured health plans and being self-insured.
PBS sets aside enough money each month to more than cover expected claims, plus an additional amount for administration fees and for a stop-loss policy, which kicks in when an unexpectedly high claim is incurred. The biggest advantage of the plan is PBS pays a fixed amount each month, though Reiser declined to say how much.
“We need to know what that cost is going to be each month,” he said.
Level-funded plans accomplish this by examining a company's previous medical claims to estimate what future costs will be — similar to medical underwriting, which the Affordable Care Act outlawed for traditional health insurance.
“One in two small businesses will qualify and save 10 to 40 percent a year,” said Russ Carpel, CEO of LevelFunded Health Partners, a Boca Raton, Fla., insurance agency that sold PBS its benefit plan.
But level-funded health plans aren't for every company. Only employers with a healthy workforce qualify for the stop-loss policy, Carpel said. Companies whose employees have chronic conditions won't save money with a level-funded plan.
“Unfortunately it's not for everybody, but it's still for 50 percent of the market,” he said.
Level-funded plans have been slow to take hold in the market. But UPMC Health Plan is expecting demand to rise for the products in coming years. The health insurance division of hospital giant UPMC began selling a level-funded plan this year for companies with 50 to 200 employees that renew policies on July 1 or later, said John Mills, senior director of commercial products.
While most small to mid-sized employers in Western Pennsylvania have fully insured health plans, Mills said he expects those companies to consider self-insuring through level-funded plans as their costs continue to rise.
“These have become very popular in other markets,” he said.
Not everyone is convinced that self-insuring is right for the small business market. Kaiser's Claxton said he thinks state insurance regulators may begin to crack down on level-funded plans. California and New York have outlawed them for companies with fewer than 100 employees by not allowing insurers to write stop-loss policies for small employers.
And level-funded plans pose a risk for the fully insured market. If companies with young and healthy workforces drop out of the traditional insurance market, premium rates may rise dramatically for the older and sicker employers groups that are left, Claxton said.
That market already is “shrinking away,” he said. “And this will shrink it faster and make it less healthy, which will shrink it even faster.”
Alex Nixon is a Tribune-Review staff writer. Reach him at 412-320-7928 or anixon@tribweb.com.
