The rising price of health-care premiums has more companies paying for their employees' medical expenses themselves rather than buying traditional health plans from insurers. Advisers should be aware of what the option entails for their small-business-owner clients — and possibly as a strategy for their own firm.
It's called self-funded employer health care, and the portion of mid-sized firms taking on this responsibility has risen about 19% over the past two years, according to an Employee Benefit Research Institute report.
“More companies are saying there has to be a better way — that they want to provide benefits to workers, but their choices are not ideal,” said Mike Ferguson, chief executive of the Self-Insurance Institute of America. “That's prompted more companies to look at self-insurance.”
The move saves money for the right companies and allows employers to tailor health-care benefits to their workers' needs. Traditional insurance plans don't tell employers anything about their employees' collective health or why premiums need to increase from year to year.
“Many more CFOs are looking at this as a way to put control in employers' hands, so they're not at the whim of the insurance companies boosting rates,” said Adam Russo, chief executive of benefits firm Phia Group.
Smaller companies also can consider joining with other groups in what are called captives to spread the risk further, he said.
All firms that consider self-funding should have a strong balance sheet and recognize that costs will be variable, Mr. Russo said. Firms that have a steady workforce will be best able to forecast future claims.
In addition, the leaders of the companies should support a proactive approach to managing long-term risk.
"This isn't just to avoid a big rate hike over one year," he said. "It's a long-term risk management approach."
For firms with at least 25 employees, making the switch from fully insured health coverage to a self-funded plan can save employers $1,000 per employee every year, said Chris Wilmerding, principal of investment management firm Thayer Partners. These savings are typical for four out of five years, with the remaining year seeing any savings offset by health-care costs incurred by the company. Self-funding makes sense for firms of this size in seven out of 10 cases, he said.
About 80% of firms with 500 or more employees and 30% of those with 100-499 workers self-fund their health insurance, according to the July 2016 EBRI report, and this trend that began 40 years ago is moving down-market.
One of the greatest increases since 2013 in the number of workers covered by self-insured plans is for establishments with 25-99 employees.
NOT FOR EVERYONE
Mr. Ferguson is the first to admit that self-funding isn't for all firms.
One of the greatest fears is taking on unlimited risk should an employee be hit with a catastrophic medical condition.
But self-funded health plans have two protective layers of insurance: one that caps the total liability per employee and another that sets a total maximum that the company can owe if a surprising number of employees hit the cap, Mr. Wilmerding said.
The cost of those insurance premiums, though, can change every year.
Mr. Russo said risk also can be mitigated by incentivizing members to use lower-cost providers for health-care services.
For instance, firms can write into their plans that an employee who has a procedure at Hospital A, which charges $10,000, instead of Hospital B, which charges $30,000, can receive 25% of the difference. That would save the employer $15,000 and give a $5,000 boost to the employee having the surgery.
With self-funding, employees still pay a premium to their employer and receive a health plan card from a major insurance company that they can use at doctors and hospitals. But their employer administers the health-care program and pays the medical bills, instead of paying the insurer a fixed premium each year.
As financial advisers' firms continue to trend larger, self-funding health insurance may become a practical solution to combat health premium increases each year.
But so far, advisers appear to be sticking with traditional health insurance plans for their employees.
“I understand the potential appeal of self-insuring, particularly when supplementing with external insurance for catastrophic situations,” Michael Nathanson, chief executive of The Colony Group, wrote in an email.
But his firm continues to choose a fully insured health plan with a reputable carrier because they believe the benefit “helps us attract and retain the best talent,” he said.