One advantage of being a small business is that I could drop my insurance altogether and because I have less than 50 full time equivalent people I wouldn’t even be subject to a penalty. But, as other employers will agree, I’ve found that this option would only make it harder for me to attract good people in this time of low unemployment and increased competition from big companies. So, like many small business owners, I buy a high-deductible, high-out-of-pocket “bronze” plan and push as much of the cost as possible to my people. Unfortunately, this is still insurance and I’m also paying for the insurance companies’ increased costs, taxes and profits. Is there another option for a small business? There may be.
According to the Department of Health and Human Services approximately 82 percent of companies with more than 500 employees self-insure their healthcare. This is a big company thing. The number drops considerably among employers with less employees. But the option is becoming increasingly popular among small companies like mine.
“We’ve seen self-insuring significantly grow among small businesses over the past few years,” says Mike Ferguson, president and chief executive of the Self Insurance Institute of America. “It’s a very viable option to keep healthcare costs under control. It works as long as the company is the right fit.”
Self-insurance works like this. You pay a premium every year into a pool with other employers so everyone can spread and share the risk for everything else. The bigger the pool, the more diluted the risk. Throughout the year, your employees submit their claims to a third-party administrator you hire. You also buy “stop-loss” coverage that insures you against any big exposure. At the end of the year, and based on all the claims submitted, the members of the group either get money back or are required to pay in more.
Yes, you’re still exposed to paying out more if more expenses are submitted. And yes, you’re still paying more for health expenses because doctors, hospitals and pharmaceutical companies are all facing higher costs themselves and are passing these costs onto their customers and patients. But when you self-insure you have less regulatory oversight from the Affordable Care Act and can pick and choose what coverages you want to offer your employees. And you’re not paying a higher amount to compensate an insurance company to take on the risk (and the additional taxes they’re being charged) so, if things are managed correctly, your overall healthcare costs could be much lower than the similar guy down the street with the traditional group plan.
This is the case for Vincent C. Hvizda, chief executive of Admiral Products in Cleveland. Hvizda decided to self-insure his 38-person company three years ago. And the cost savings have been significant. According to Hvizda, if he weren’t self-insuring he would’ve faced premium increases in excess of 35 percent last year alone. Instead, he only incurred an 8 percent increase. Hvizda pays about $400,000 in healthcare premiums.
“The decision to self-insure has been the right one for my small company,” he told me. Hvizda uses a local broker (Roundstone Insurance) and a national company owned by Aetna (Meritain Health) as his third-party administrator.
Like Hvizda, this option will only work if you’re confident that your employee health history is good (easier said than done because unfortunately, may insurance companies have been less than helpful providing this data to their customers). And it will only work if you have someone internally who takes responsibility for your self-insured plan – setting up agreements with local doctors or urgent care centers, creating rules and policies, negotiating deals with the local pharmacies, supervising the administrators, watching the costs. Even for a small business with a few dozen employees this could take a significant amount of time. Research needs to be performed. And the right broker–someone with self-insurance experience– needs to be hired. This need for resources and oversight is why (according to the same HHS study mentioned above) less than 5 percent of businesses with less than 50 people self-insure.
But things are changing, according to Ferguson at the SSI. In the wake of rising costs, managers are taking a turn. “The rise in rates have motivated executives at small companies to take a greater interest in their healthcare culture. And these executives are committed to the program and for providing best-in-class features. They are proactive, engaged and have a culture that includes wellness programs and other incentives to keep their employees as healthy as possible.” Hvizda pays for nursing visits, blood tests and seminars for his employees and strictly enforces non-smoking and other proactive policies to encourage healthy living.
Oh, and one other thing: Small businesses that self-insure should always make sure they’re in a financial position to write a big check in case something unexpected happens. It hasn’t happened yet to Hvizda. But he’s a realist. And if the program ever became too expensive he’s prepared to switch back to regular group coverage. In the meantime, he’s happy. “Given the fact that we’re 38 people and going into the fourth year I think it’s a good program,” he says. “If the big guys are already in it, why not us?”