Self-funded plans draw small-firm interest

In the face of new health reform restrictions, expect more small employers to opt for self-funded health benefits—so concludes a report this week from Indianapolis-based United Benefit Advisors LLC.

UBA, which links a network of employer-benefits agencies across the country, found in 2010 surveys that roughly 12 percent of employers with fewer than 200 workers have self-funded plans, but more are showing interest in them since the passage of the health reform law a year ago.

Among all companies surveyed by UBA last year, 12 percent of employers want to switch to self-funding someday.

“Self-funded plans will become more common and provide more control,” said Jeff Hadden, a partner of Indianapolis-based LHD Benefits, also known as LoCascio Hadden & Dennis LLC, in the UBA report.

A self-funded health benefits plan requires an employer to pay its workers’ medical claims rather than paying an insurance company to handle them. Self-funded means a company bears the risk of really large claims. Therefore, many self-funded employers buy stop-loss insurance that kicks in for large one-time bills or when overall claims reach a high threshold.

Employers like self-funded plans because the costs can be less, but the drawback is costs can be unpredictable.

The new law tries to hold down prices for all firms by requiring insurers to spend at least 80 percent of premiums on health benefits, something called a minimum medical-loss ratio. Also, the new health reform law will no longer allow health insurers selling fully funded coverage to price their policies based on the health status of an employers’ workers. For health plans covering fewer than 100 people, insurers will be able to adjust prices only for age, tobacco use, family versus self-coverage and region.

This so-called “community rating system” will benefit employers with unhealthy workers. However, the new rules likely will raise costs for companies with healthy workers. Also, because community rating sets prices based on a pool of employers in one geographic region, efforts by individual companies to use wellness programs to improve their workers’ health would have minimal effect on the cost of coverage.

“The sickest groups will remain fully funded and rely on community rates and mandated medical-loss ratios,” said Hadden at LHD Benefits. He added, “If groups are self-funded with appropriate levels of protection in place, they have more control over their costs and don’t have to be driven by the community rate.”

Stop-loss insurers, recognizing the growing interest from small firms, recently started offering coverage for employers with as few as 25 workers, Hadden noted.