As a business owner, you’ve probably heard that a lot of businesses are “self-insuring” or “self-funding” these days. You may have even looked into it but it sounded like something only giant corporations with thousands of employees do. And, as a local employer without that kind of scale, you never got past that initial, cursory Google search. It was just simpler to purchase insurance through a large carrier like Blue Cross or United.
Unfortunately, in today’s business climate, oversimplifying your healthcare strategy is no longer a good decision. It’s no secret that healthcare costs continue to skyrocket and are directly impacting your bottom line. Employers are footing 82% of the bill for single employees and 71% for families, which comes out to an average of $5,655/year for each employee and $13,927/year for each family.
And that’s just the cost of the premium.
Employees still have to chip in out of pocket and meet deductibles as high as $6,650 for individuals and $13,300 for families before insurance even kicks in. Combined with copays and coinsurance, you and your employees are left wondering what the insurance was even for.
Do the math on health insurance
As health insurance costs continue to rise, it makes more sense for businesses to stop paying a health insurer like Blue Cross or Humana or United for coverage and just pay out of their own pocket. That seems terrifying but, if you stop and think about it, it’s not like health insurance was keeping your costs or financial risk down.
Let’s walk through an example:
You’re a local business owner with 50 employees. About a quarter of your employees need individual coverage for health care and the rest need family coverage.
25% of 50 employees = 13 individual employees
75% of 50 employees = 37 employees with families/dependents
Annual insurance premium costs for individual employee: $5,655
Annual insurance premium costs for family: $13,927
(13 x $5,655) + (37 x $13,927) = $588,814
So, insurance premiums for all of your employees will cost you over half a million this year. That’s pretty steep, but you need to offer employees health care and you know that if any of them gets seriously sick or injured, those costs can add up quickly. You go ahead and sign up for health insurance through Blue Cross.
Fast forward five years. Your local business has expanded and you now employ 200 employees. Things seem to be going well, but operating expenses are adding up. At the top of the list, health care costs are your #1 expense.
You revisit your spreadsheet and run the numbers again:
25% of 200 employees = 50 individual employees
75% of 200 employees = 150 employees with families/dependents
Annual insurance premium costs for individual employee: $6,556
Annual insurance premium costs for family: $16,145
*assuming a 3% increase in your premiums year over year
(50 x $6,556) + (150 x $16,145) = $2,749,550
In five short years, your insurance premiums ballooned to $2.75 million. And, even if you don’t hire another employee for the next five years, you can expect your premiums to continue to rise. At a 3% increase each year, that $2.75 million will quickly become $3.19 million.
Frantically, you call your insurance broker or benefits advisor and they schedule some time to meet the following week. At this meeting, your benefits advisor tells you that, with 200 employees, you’re simply too big to keep purchasing insurance from a large insurer. Your best bet is to become your own insurer and start self-insuring.
What does it mean to self-insure?
Self-insured businesses choose to pay for health care costs themselves, rather than purchasing an insurance policy. The idea is that by saving the money you would have spent on insurance premiums for all of your employees, you can just pay the bills if and when they occur.
You can still go through an insurance company to manage the claims (or use a third-party administrator), but at the end of the day, expenses are paid out of your own pool of money rather than by the insurance company. This strategy is widely adopted by larger businesses with hundreds or thousands of employees, because of how quickly insurance premiums can add up. But, as overall insurance costs continue to rise, the number of smaller businesses that are self-insuring is growing.
Sounds risky. What if multiple employees get sick?
By self-insuring, employers are taking on the financial risk. This is great for saving money, but in the event that you have a terrible year with employee illness or injury, you might worry about costs spiraling out of control.
Fortunately, self-insured businesses can purchase stop-loss insurance. This is basically a safety net that either caps your total expenses or individual claims that go over a certain amount. Let’s say you purchased a stop-loss policy for $500K. Even if you had a few serious claims, you’re guaranteed to not have to spend more than that amount, thereby managing your risk. Stop-loss guarantees that, as a self-insured business, your costs will never exceed a certain threshold. This is important in the event that your company has an unusually bad year in terms of adverse health care events. Accidents, cancer treatments, and other high-dollar claims can be devastating to even the most stable workforces, and stop-loss insurance controls them.
This is a much more cost-effective strategy than purchasing a traditional health plan. You get the cost savings and flexibility of self-insuring, with a backup plan.
Does self-insuring make sense for you?
It’s crucial that you assess your healthcare strategy as an employer. Simply signing up for a traditional health plan can lead to serious financial consequences for your business. Even if you’re a small business, it’s worthwhile to talk to your broker or benefits advisor about it. Perhaps you don’t need to self-insure today, but as your company grows, it’s important that you understand when it’s the right time.
If you’re unsure how to begin, the Free Market Medical Association (FMMA) has plenty of helpful information on self-insuring through their publication. You can also check out the Self-Insured Institute of America or this Milliman white paper.
If you’d like to get connected to a benefits advisor that understands self-insuring and how to save your business money, reach out to us! We’re happy to make an introduction.