Table of Contents
Self-insurance is a policy offered by an insurance company, which indemnifies the insured entity for losses without having to pay premiums. This means that the insurer assumes liability and pays out any damages from accidents or other events. The term “self-insuring” doesn’t have a literal meaning; it’s just marketing lingo used to describe when one party (the insured) pays all of their own expenses in case of significant loss. Self-insured entities can also be companies with high employee turnover rates or those who don’t qualify for traditional life insurance policies due to health concerns like cancer or diabetes.
Self-insurance is the act of insuring oneself and paying for health care out of pocket, rather than through insurance. It can be done by an individual or a business. Read more in detail here: self-insurance examples.
Self-insurance (also known as self-funding) enables small company owners to design and administer their own insurance policies without the constraints and expenses associated with dealing with bigger conventional insurance companies. Self-insurance, on the other hand, carries a significant amount of risk and responsibility.
We’d want to start by saying that self-insurance isn’t always the greatest option for small company owners. Self-funding your insurance may be a tremendous administrative headache, and it comes with legal and financial dangers. Please continue reading to discover more about why it could or might not be a good fit for you.
What is the definition of self-insurance?
The employer assumes the risk of providing health insurance coverage for its workers under a self-insurance arrangement. In the end, it implies that the company is accountable for paying qualified claims from a fund that the company established and maintains.
In a typical structure, the employer/employee pays premiums (a monthly fee) to an insurance company, which is subsequently responsible for paying any qualified claims.
Other benefit categories, such as dentistry, vision, disability, and insurance, may be self-funded in addition to medical coverage. Regardless of whatever sort of insurance you select to self-fund, the procedure remains the same. The most frequent option, though, is to begin by self-funding your medical coverage.
Traditional Insurance vs. Self-Insurance
Traditional health insurance works with a specific network of physicians and hospitals and provides companies with a variety of plan alternatives to choose from for their workers. After choosing a plan, an employer pays premiums (monthly bills) to the insurance provider to cover all of their workers who are enrolled in the plan. Employees may fund a part of these expenses via payroll deductions if the company chooses. The money is then held by the insurance company and earns interest (as it is invested) until it is required to settle a claim.
To set up self-funded insurance, you’ll need to deal with a benefits consultant or broker. They’ll be able to assist you with drafting the specifics of a plan, locating a provider network of healthcare specialists, and locating a third-party administrator (TPA) to handle the continuing busywork, such as claims submissions. The consultant or broker will help you build your plan, but it will be managed and administered by the TPA.
Employers may either pay for coverage themselves or have their workers pay a part of it via payroll deductions, much as with conventional insurance. Rather of sending payments to an insurance company, this money is put into a special bank account that will be used to pay any future obligations.
Self-insurance will seem to your workers in the same way that regular insurance does: they’ll submit an insurance card at the doctor’s office, pay copayments, and seek reimbursements as needed. The main distinction is that these expenses are deducted from your allocated bank account and are overseen by your TPA. If you’re concerned about prices spiraling out of control, stop-loss insurance may be purchased to limit the amount of money you’ll have to pay out-of-pocket for any claims made on the plans.
To summarize, with conventional insurance, the risk is assumed by the insurance provider. With self-insurance, you are the one who bears the risk as well as the administrative burden.
Where Can You Look for a Third-Party Administrator?
You’ll usually engage with a local healthcare consultant or broker to identify a third-party administrator who can handle a self-funded insurance plan. They should be able to find a TPA that can set up your sort of plan and has worked with businesses similar to yours.
Even if you’re going via a broker, be sure to verify the TPA’s references and make sure they can provide you with all of your needs.
Small Businesses & Self Insurance: Not Usually a Match
As previously indicated, self-insurance is not always the greatest option for a small company. Listed below are a few of the reasons behind this:
- Liability and Risk — If there are any large claims or flaws with the plan, the employer assumes a lot more risk. Furthermore, the employer is given medical information and data about their workers (HIPAA data), which must be securely kept, accessed, and managed. You’ll also require HIPAA training, which will cost extra money (the medical privacy law).
- Cost “Savings” — A self-funded plan may not provide considerable (if any) cost savings to a company with less than 100 workers. The time and effort required to set up, execute, and manage the strategy generally surpass any possible benefits. Not to mention the anxiety that comes with it.
- Steep Learning Curve — You already have a lot on your plate as a small company owner. Health plans must adhere to a number of legal rules that differ from state to state and are not easy to comprehend, much alone administer. There is a lot of information to learn and process unless you have prior expertise with benefits administration. It’s possible that leaving it to the professionals is the best option.
Another option worth exploring for your company is one that combines some of the benefits of both self-funding and standard insurance. A partly self-funded strategy is what it’s called.
Plan that is partially self-funded
I used to work for a small technology business, and we were in the middle of renewing our benefits with our benefits broker. That year, our renewal bids were more than 40% more than the previous year! This was not a financially viable option for the company or its workers.
Because we had less than 50 workers, our rates were decided using a composite rate, which was one of the key reasons for the hike. This meant that we were being categorized according to the demographics of our zip code, and our prices were based on that insurance. Our fees were rising mostly as a result of other firms’ increased usage of their programs!
The price rise didn’t seem fair since we had a very youthful and healthy staff that didn’t go to the doctor very often. We decided to look at a largely self-funded approach at that point:
A big conventional insurance firm provides and administers the policies in a largely self-funded plan. The risk pool, like that of a self-funded plan, is restricted to your workers. To assess your choices and costs, the underwriters for your plan will conduct a complete census and health survey of all of your workers.
You will continue to pay a monthly premium to the provider, but the amount will be calculated by the plan’s underwriters using a “worst case cost scenario.” The funds are placed in a claims fund, which will be used to settle claims. If this fund runs out, the insurance company will pay any further costs, but your premiums will almost certainly rise the next year. On the other hand, if your plan underperforms the underwriters’ expectations at the end of the year, you may be eligible for a refund.
If you have a pretty healthy staff but don’t want to take on the risks and liabilities of a self-funded plan, this might be a good alternative to consider.
Costs of Self-Insurance to Consider
There are certain expenses to consider when deciding whether or not a self-insurance plan is good for your small company. A standard insurance provider’s expenditures are clear and consistent— generally, the only variable is the monthly premium per employee, which varies from year to year.
The expenses of self-insurance are somewhat more complicated:
- The amount of money you may need to pay to support employee claims against the plan, less any money set away by your workers, plus interest.
- The plan’s administrator and vendor expenses.
- Cost of stop-loss insurance, which limits your overall financial responsibility on a plan (prices range from $12 to $100 per employee each month, depending on a variety of circumstances — call a broker for more information).
- Keep in mind that claims may vary and may have an impact on the company’s cash flow.
Despite all of these possible expenses, there are still some compelling arguments for self-insurance.
What Makes a Small Business Consider Self-Insurance?
Again, most small firms lack the resources to develop and operate a self-funded strategy effectively. To even contemplate this option, you’ll need a big enough company (over 100 workers) to adequately manage the risk pool and reap any cost benefits.
However, if you operate a bigger company, these are some of the most compelling reasons to seek self-funded insurance:
- Employers that self-insure have the ability to customize the plan depending on the health of their employees and are not restricted by the plans supplied by insurance companies.
- Due to the absence of insurance company overhead and fees, as well as reduced state taxes, plan costs are cheaper than conventional offers (self-funded plans are not subject to state health insurance premium taxes).
- Other employers do not impact the coverage carried by your organization since the risk pool is limited to your employees only. For a business with a mostly younger & healthier workforce, this can mean potentially lower costs. This benefit also applies to partially self-funded plans.
Self-insurance has a number of drawbacks.
Although there are several advantages to switching to a self-funded health insurance plan, you should be aware of the following possible drawbacks:
1. The financial implications might be scary.
Medical claims may change substantially more than predicted if one employee is abruptly diagnosed with a serious medical condition. Your employee will still have to pay their share, but you will cover the remainder.
2. Budgeting may be difficult.
How do you budget for the unexpected, as mentioned in the first disadvantage? This is particularly difficult if your cash flow is unpredictable.
3. You may be subjected to legal action.
If a legal action is brought against the self-funded plan, the employer and its assets may be held liable.
4. It might be a hassle to manage.
Even with the help of a third-party administrator, the administrative burden of running the plan will be more than it would be with a standard insurance company. You’ll get monthly updates on how well your strategy is working, and you’ll have to keep a close eye on it.
If you provide self-insured coverage, keep in mind that you must submit yearly reports with the IRS, detailing your coverage and the people who are covered. The HR and benefits platform from Zenefits gathers the employee data you need to be ACA compliant while also making it simple for workers to enroll in and manage their benefits online. For a limited time, you may try Zenefits for free.
Visit Zenefits for more information.
Dos and Don’ts When It Comes to Self-Insurance
- Before choosing a third-party administrator to handle your claims, do some research and chat with a few. Check to see whether they’ve dealt with businesses of comparable size to yours, and inquire about the services they’ll provide your workers (enrollment assistance, claims management tools, etc.)
- If you decide to purchase stop-loss coverage, make sure you read the tiny print. In the case of a huge catastrophic occurrence involving one of your workers, what would happen to your plan? Will it be renewed?
- Remember that depending on the size of your firm and the plans you choose, you or your administrator may be required to submit yearly ACA (Affordable Care Act) reporting.
- DON’T ASSUME that all states’ coverage laws are the same. Examine your local regulations and ensure that you are abiding by all relevant rules.
- DON’T assume that switching to self-funding is the best way to save money; study the arithmetic and make the best predictions you can before making the transition! Long-term, self-funded plans are usually more cost-effective, although they are not always profitable.
Final Thoughts
Self-insurance may be the ideal choice for you if you want to save money on medical insurance, have a generally healthy staff, and are prepared to take on the risk of this sort of plan. However, keep in mind the high level of risk, administrative load, and hefty initial expenditures. Because of these factors, the majority of small firms choose standard health insurance or the less hazardous partly self-funded alternative.
Self-insurance is a financial instrument that allows insurance companies to operate without the help of an insurer. It also provides protection for the insured from potential lawsuits. The disadvantages of self-insurance are that it can be expensive and less accessible than traditional insurance.
Related Tags
- self-insurance company
- self-insurance advantages and disadvantages
- self-insurance car
- advantages of self-insurance
- self-insurance is what type of risk management
