Deciding whether to be self-insured or fully-funded for health insurance is a decision based on the preference of the business owner and the projected health of a company’s workforce. It is not just a matter of saving money, local insurance experts say. Any size company can become self-insured, which means that the company assumes the risk of paying medical claims, insurance experts say.
"I am a little apprehensive when smaller groups with below 100 employees go to self-funding," said Tim Bever, vice president of employee benefits for Johnson Insurance Inc. in Racine. "Companies need to understand that there are pitfalls to it."
The majority of companies that are self-insured purchase stop/loss insurance, local insurance experts say. For example, a company may offer to pay up to $10,000 of each individual’s medical bills. The company pays every claim that is under $10,000, and the stop loss insurance would cover anything over $10,001. Employers collect premiums and may install their own deductible for employees to pay to the company.
Fully-funded insurance means that the entire health insurance plan of a company is covered by an insurance carrier.
Both self-insured and fully-funded programs have their advantages and disadvantages for each business owners.
For instance, when a company is self-insured, it does not have to comply with state mandates for health insurance plans, said Eileen Mallow of the Wisconsin Insurance Commissioner’s Office.
Employers can customize their health insurance coverage as they see fit. For example, their coverage could include 10 free chiropractic office visits per year for each employee and $100 in X-rays, said Joe Snyder, executive vice president of sales for Oconomowoc-based Snyder Insurance Agency Inc.
"More money goes to pay claims and less money goes to the day-to-day operations of an insurance carrier," Snyder said.
With a fully-funded health insurance plan, employers know exactly what they owe for premiums each month, while, with a self-insured plan, a company could have $30,000 in claims one month and $100 in claims the next, Mallow said.
Also, with a self-insured plan, the employer is responsible for paying the medical claims within the allotted amount of time, whereas, when a company is fully-funded, the insurance company has that task.
Be Prepared
Companies should be financially prepared to be on a self-insured plan and consider the health of their workforce before deciding to take the risk of high claims to potentially save money in the long run, insurance experts say.
Badger Packaging Inc. in West Bend was previously self-insured and has slowly moved toward becoming fully-funded, said controller Steve Tiffany. The company utilizes the services of HNI Risk Services Inc. in New Berlin.
When Tiffany joined the company five years ago, Badger insured each employee up to $15,000. Badger was able to lower its rates by assuming part of the risk of medical claims, Tiffany said.
Badger has about 45 employees. As time passed, and as a result of medical claims, to continue the best coverage for its employees, Badger had to increase its risk by raising its deductible to more than $30,000 per employee.
The company needed to look to a more stable and risk-free insurance plan, Tiffany said.
"Our overall goal was to become fully-funded, because we did not want the risk to be on Badger, and we wanted to protect our employees by keeping the same level of coverage," he said.
Badger Packaging ended up transitioning by going to a partially-funded insurance plan, which was similar to self-funded but with lower deductibles, before transitioning to the fully-funded plan with United Healthcare Insurance Co., based in Minnetonka, Minn.
"When we were first looking at a fully-funded plan, we thought we could not afford it because we could not afford the premium at the time," Tiffany said. "But when we got to the point where we offered wellness programs and we worked internally to educate employees on keeping their claims under control, we got to the point where it was favorable to take the liability off of the company and make the switch."
Clients of insurance consulting companies can compare each year what claims would have cost the company if it was self-insured, instead of fully-funded, and vice versa. Calculating the historical claims can aid a business owner in determining which type of insurance would save more money.
One client of HNI realized that it could have saved $70,000 in one year if it was self-insured instead of fully-funded, said Debbie Kraemer, a benefits specialist for HNI.
Racine Federated, Inc. has been self-insured for seven years and enrolls about 110 employees in its health insurance plan, said Dave Perkins, the company’s chief financial offer.
When Racine Federated was on a fully-funded program seven years ago, the company experienced high rate increases because of indemnity, or use.
Big Savings
By becoming self-insured, Racine Federated saved $300,000, Perkins said.
"We are now only paying our claims and not overhead," Perkins said. "We have a fee we pay to the third-party administrator but nothing to the extent of the overhead that the insurance company was charging. Plus we have ongoing savings."
Racine Federated, which is a client of Johnson Insurance, has stop/loss insurance that started at $35,000 per individual and is now up to $55,000, Perkins said. The plan is reviewed annually and compared with other plans.
Even with catastrophic claims from instances involving cancer, pregnancies and other expensive situations, Racine Federated feels it is still saving money compared with the costs of indemnity, Perkins said.
Susan Rabe, Milwaukee office leader for New York-based Mercer Health and Benefits, said the main determinant of the self-insured vs. fully-funded equation is cash flow. On the other hand, the risks involved with self-insured plans may not be as attractive to some employers.
"Insurance companies should have the reserves they can absorb and ride the bumpy roads better than the employers themselves," Rabe said. "But if employers have a healthy workforce and the demographics look to stay stable, employees do the right things, employers may want to take the risk and self-fund."
