Insurance rate increases leave small businesses considering a newly feasible option

Matt PfeiffenbergerHealth Benefits, Insurance, Risk Management, Third Party Claim Administration


The nature of healthcare and employer-provided medical insurance is changing dramatically, leading insurance carriers to raise premiums in regions across the U.S. Now, employers in central Pennsylvania are feeling the effects. For companies with 25 to 150 employees, these increases may range from 10 percent to 50 percent – enough to be problematic, especially for a small company. The biggest increases have come to those employers that are fully insured, leaving some considering self-insurance and all, at the very least, weighing their options.

The Affordable Care Act (ACA) imposes extra costs and burdens on the fully insured plans. As insurance premiums rise many fully insured employers are forced to increase plan deductibles. Moreover, the typical fully insured employer with 100 people or fewer on staff has little to no claims data information as to the types of claims that account for the increase in cost. In other words, as their costs go up, they have little way of knowing which claims are primarily driving that cost and how they can adjust their plans to address those concerns.

On the other hand, self-insurance offers a few perks that may better help to manage costs without compromising coverage. For smaller employers looking for a way out from under the burden of premium increases, self-insurance is a viable option for the first time. 

Healthcare has grown into a costly item for employers.Healthcare has grown into a costly item for employers. For most companies, employer-provided medical insurance is often the No. 2 budget item on the company’s ledger.

The appeal of self-insurance
There are two types of self-insurance that have gained popularity among small businesses: Traditional self-insurance and level-funded self-insurance.

Typically, a company will hire a third-party administrator to handle claims processing and logistical matters while the employer retains the risk and pays the claims as they arise. An actuarial study can help companies assess their expected claims cost and appropriately establish plan funding. That way, companies can be sure they have the cash reserves to protect against any sudden increases in claims. The self-insured employer agrees to pay claims as they come in – up to a certain amount by a certain date. Stop loss insurance helps protect against any one large claim as well as protecting the employer plan from excessive aggregate claims. In this way, traditional self-insurance is a viable option.

Prior to healthcare reform and the recent spikes in healthcare benefits, self-insurance was often too risky for smaller companies due to three deficiencies: cash flow, internal manpower and available claims data. Without such resources, small businesses cannot adequately assess the costs, risks and benefits of self-insurance nor afford to process claims in-house if they did. A third-party administrator can review and process claims, guarantee compliance and prepare the necessary plan documentation to effectively administer the plan.

“Level-funded self-insurance involves predictable costs.”

Level-funded self-insurance
This is an emerging form of self-insurance that serves as the happy medium between fully insured and self-insured solutions.

Level-funded self-insurance also involves stop-loss insurance, both for individuals and the group of insured in a company. Under a level-funded ASO (administrative services only) contract, the insurance carrier or TPA converts the employer’s expected paid claims into a fully-insured equivalent rate which is a set monthly premium amount billed to the employer. The carrier processes, pays and tracks claims during the year and, with this data, examines the amount an employer paid out in claims against the premium paid. If the employer’s paid claims run under the expected claims for the year, the employer is reimbursed a significant portion of the difference. In essence, level-funded self-insurance involves the predictable costs of full insurance combined with cost management features of being self-insured.

The significance of self-insurance for small companies
It would have been unthinkable five years ago for self-insurance to be a viable option for employers with as few as 25, 50 or 75 employees. Now, with the impact of the ACA and other emerging changes in the healthcare field, this is but one of several new trends.

Another important item to note is how third-party administrators can leverage the data extracted from healthcare premium and claims costs. While that information was once difficult to come by for small companies, now those employers can use their administrative partners to understand the types of claims that drive costs. That can lead to wellness programs or incentive structures that promote employee health and avoid costly claims. It’s another appealing facet of self-insurance as it exists today.

The fact is that employee benefits are expensive for all employers but most especially for smaller businesses. Controlling these healthcare costs is now essential for companies of this size – roughly 85 percent of employee benefit dollars spent are on health insurance plans.

This is where Murray can help. Our team serves as a broker, consultant and strategic long-term partner to evaluate your healthcare data to determine the right types of medical, life, long-term disability and retirement benefits you can provide employees. As the ACA and other regulations continue to reconfigure healthcare options, it’s important to navigate the changes and identify how your company can avoid incurring unnecessary financial risk, manage costs, and sustain a competitive benefits program.

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