Self-Insuring Your Small Business

In one of our blog articles a few weeks back, we discussed risk retention as a component in the available approaches to risk management.  As we are counting down toward the full implementation of the Affordable Care Act, risk retention – or self-insurance –is getting increasing attention as a strategy for dealing with health care cost.  Risk retention is one of the strategies that large companies have used for years in the health care and worker’s compensation arenas.  Even in Washington State with its Labor and Industries sponsored program, companies can exercise an option to self-insure.  

In self-insurance for health care, the employer takes on the responsibility for paying health care benefits for employees and other covered persons.  The company accepts the risk for providing health care benefits and pays claims out of cash flow or from a reserve specially designed for that purpose.  The employer may fund the insurance completely, or may elect to collect a contribution from employees to help defray the expenses.  

For large businesses, self-insurance has always been an option and in the year 2000 as many as one-third of American Workers who participated in a company sponsored health plan were in a self-insured plan.  Large companies elected to self-insure because it allowed them to create custom health plans to suit their workforce and it allowed them to maintain control over their financial reserves.  

Small businesses tended to steer clear of self-insurance because the unpredictability of expenses was high and the ability to negotiate favorable prices with providers was low.  The Affordable Care Act may be changing the ecology for some small businesses and the New York Times notes that employee benefit consultants are beginning to promote self-insurance as an option for employers with only 10 or 20 employees.  

The Act mandates the inclusion of a larger set of benefits which may increase insurance costs and there may be a reduction in overall costs as there are fewer uninsured people.  For small businesses, being self-insured could let them avoid these new requirements for benefits like mental-health and maternity care. Self-insured companies may also be able to gauge their risk and take advantage of reduced expenses that could accrue to groups of healthy workers.
An article in the Wall Street Journal earlier this year, noted the trend and some of its causes.  It concluded, among other things, that there was likely to be an increase in the rate of self-insurance among small businesses as employers began to test drive the concept.  The article also shared the concerns of regulators that an increase in self-insurance among companies with a young and healthy worker profile could have an adverse effect on the market in general causing premiums to rise for the companies remaining in the risk pool.  

An article in BusinessWeek echoed the same sentiments and noted that some states were considering regulation of the reinsurance, or stop-loss policies that help make self-insurance a viable prospect for small business.  At this point, there is far more speculation than fact in the reporting and while risk retention is always an option for any business, there is an attendant risk that a single large claim could do significant damage to a small business’ bottom line.

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