What About
A ‘Partially’
Self-Insured
SELF-INSURANCE?
I
f you associate self-insured health
plans with big, public companies with
a few thousand employees, you might
be surprised to learn that small- to
mid-sized businesses can benefit from
specific types of self-insured plan too.
The traditional model in self-insured
health insurance is that the employer
pays health care costs up to a certain
dollar amount for each employee before
a stop-loss insurance policy kicks in to
pay the rest. A stop-loss policy is typi-
cally designed to pay claims that exceed
a specific amount of catastrophic medi-
cal claims for particular employees. For
instance, a company might pay for all
medical bills up to $100,000 per em-
ployee, and then the stop-loss insurance
would pay on any employee medical bills
that exceed that $100,000.
As you can see, with the traditional
model, self-insurance only makes sense
if you could spread out the risk of those
few employees who might have sub-
stantial claims throughout the rest of the
employees. For that to work, you need
many employees – 200 employees is a
good number.
With a self-insured plan, an employer
chooses to pay for individual health
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Health Plan?
claims out-of-pocket instead of a month-
ly fixed premium to a health insurance
carrier. This can actually allow employers
to save a lot of money on insurance pre-
miums and costs, but it also exposes the
company to more risk if there are more
claims to pay than expected. Employ-
ees still pay the employer for insurance
premiums – that money is just going to
the employer as the actual insurer. The
strategy is to make enough money in
employer-side premium savings, and the
premium amounts paid in by employees,
to cover the cost of medical expenses. How Does It Work?
While some employers use the tradition-
al self-insured option described above,
there are now options for smaller compa-
nies to reap the benefits of self-insured
plans at a much lower risk – one of which
is a partially self-insured health plan. Oftentimes, companies save a signifi-
cant amount of money with these plans.
With a higher deductible, the overall
premium for the insurance is lower. The
employee is getting the same sort of de-
ductible they’re used to (in this example,
$2,000) and pays the same portion of the
premium, and the employer pays less of
the premium but assumes some risk.
With a partially self-insured plan, your com-
pany obtains traditional insurance cover-
age (what you have in place right now, for
example). Your company then raises the
deductible on the group health insurance
plan to the maximum amount they can. For
example, if you have a $2,000 deductible
on your plan right now, you might raise that
to a $7,000 deductible. The company then
self-insures the difference.
Employees are responsible for the first
$2,000 of health care costs; then the
company pays for the additional $5,000
of the deductible if needed. The insur-
ance company would pay anything over
that $7,000 for each employee as nor-
mal. This is a much smaller risk, per em-
ployee, than the typical, fully self-insured
arrangement – only $5,000 per employee
instead of $100,000. While the savings
are also less, they can still add up!
The Upside
The truth is, many employees will not
even burn through the first $2,000 of the
deductible. You know (or can find out)
about your company’s overall claims
experience, to give you an idea of how
many employees might exceed this
threshold.
The company then harvests all of the
premium savings, net of any amount they
have to pay between $2,000 and $7,000.
This can give the company valuable cash
reserves to put into new machinery or ex-
pansions. Or you can invest the money
to have it available for high-claim years.
The Downside
The biggest issue is the risk. If there are
high claims, your company has to foot
the bill until its portion is fulfilled. Think
of regular insurance like interest – you
kind of know what you are getting (or
in this case, paying). Self-insured plans
are like stocks – you will have some re-
ally good years, some really bad years
and a lot in between. Overall, though,
you tend to win in the long run. After all,
insurance companies that take on the
same risk are fine!
Keep in mind that these self-insured
plans (partial or traditional) are not plans
you can just buy off the shelf. Each plan
must be customized and often needs a
third-party administrator. Companies
considering this option also need to
perform due diligence and a cost / ben-
efit analysis and should consider hiring
professionals to help. Furthermore, with
both fully self-insured plans and partially
self-insured plans, companies must file
annual 1095s for employees (if they are
not already).
While it does take some time and effort
to put the partially self-insured option
into place, your business can certainly
benefit. If you have questions, we are
here to help guide you to a decision that
best suits your company.
By Chris Ricker,
CPA, principal,
[email protected]
(Lima office)
The Small Business Corner series is designed to address challenges and consid-
erations regularly faced by owners of small- to mid-sized businesses. Check out
past Small Business Corner articles at www.reacpa.com/small-business-corner.
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