Facing Rising Health Costs? Try a Self-Help Approach

If you worry about the double-digit increases in the offing for employee health insurance, consider a strategy followed by many small and mid-size businesses: self-insurance.

Like two other strategies recently discussed in this space--consumer-choice health purchasing groups and health insurance purchasing alliances--self-insurance programs aren’t for everybody. They take work to set up and run, and because the federal government regulates them under the Employee Retirement Income Security Act of 1974, you must cross your Ts and dot your I’s.

You also must have cash flow to make the strategy work because, as a self-insurer, you pay all claims costs to a certain limit every year.

The good news is that, like purchasing groups and purchasing alliances, self-insurance allows you to tailor your health insurance package--a big plus when recruiting and retaining good people. It can also save money and give you a hedge against rising costs. Last but not least, self-insurance gets your health insurer out of your hair.

In short, self-insurance can prove a smart choice for any company employing between 50 and 250 people. At present self-insuring employers cover some 50 million Americans, according to the Employee Benefits Research Institute in Washington, D.C.

How does self-insurance work?

In one sense, self-insurance is a misnomer: You don’t become an insurance company when you self-insure your health benefits. Instead you undertake to pay claims costs out of pocket to a certain limit every year and you cover all costs beyond that point with what insurers call “stop loss” insurance--essentially a kind of umbrella policy.

To grasp the idea, think of the deductible on an auto policy. A $1,000 deductible puts you on the hook for any claim below that limit and tags your insurer for any claim over it. In essence, the arrangement makes you the insurer of the deductible--the self-insurer--because you accept the risk of loss to that extent. Similarly, when you self-insure your employee health benefits, you undertake to pay all costs to a certain limit--a big deductible, as it were--and hedge any greater costs with stop-loss insurance.

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If the idea itself is simple, setting up a self-insurance plan is not. You must calculate your appetite for risk, draw up a plan, and contract with hospitals and physicians to care for your employees. You must also buy stop-loss coverage and find a third-party administrator to oversee the plan and report on its doings to the federal government. Many health insurance agents offer plan-design services; you may also find a directory of plan designers, third-party administrators and insurers at the Web site of the Self-Insurance Institute of America in Santa Ana (https://www.siia.org).

The payoff can be substantial, according to Jeff Miles, president of the Miles Organization, an insurance brokerage and consulting firm in Marina del Rey that specializes in plan design.

For starters, because the federal and not the state government regulates self-insurers, you can avoid state premium taxes, which can run to 3%, Miles says, and if you establish formal reserves for losses, you can invest the cash free of income taxes. You may also escape certain requirements--for example, mandates that insurers cover chiropractic treatment, acupuncture, mental health claims, birth control pills or even abortions, Miles says.

Last but not least you can tweak your plan to reflect changing conditions, he says, citing the example of an employer who, discovering a spike in claims for chiropractic treatment, revised his plan to include a $500 deductible for such care--and rapidly reined in a worrisome trend.

“I work with employers who struggle to deliver a greater level of quality care for their employees,” Miles says. “Those who want to attract and retain good people in a competitive labor market can’t find traditional health plans offered by insurers to do the job. The only way to offer more extensive benefits is to self-fund for day-to-day expenses and insure for large losses.”

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Recent Financing and Insurance columns are available at https://www.latimes.com/finin. Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.