Compensation & BenefitsNews

As Affordable Care Act Looms, Self-insured Option Gains Favor

July 12, 2013Quotes & Mentions
Dayton Business Journal
As seen in the Dayton Business Journal.

The ongoing changes in health care regulations are pushing some small employers to take matters into their own hands.

Dayton-area employers that fall under the federal and state governments’ varying definitions of ‘small’ business are looking into the risky business of self-funded health care, and purchasing it, much more often than in recent years because of certain changes in the Affordable Care Act.

The trend could mean significant savings for some companies, and incentives for them to start wellness programs, but it could go awry if companies jump on board for the wrong reasons, local experts say.

Most insurance companies offer both fully-insured and self-insured products to employers, including major Ohio providers such as Anthem, United, Humana and MMO.

With a fully-insured product, companies generally pay more to the insurer up front in a premium, and the insurer takes on the full risk of the employees’ health costs.

In a self-insured product, the employer pays all employees’ minor health costs out of pocket, but buys coverage for major expenses only. And by major, that’s talking in the range of more than $50,000 for an individual, or more than $500,000 for the whole company, although there’s a wide range of policies companies can buy. In that scenario, a company would be on the hook for all expenses up to a cumulative total of $500,000 for the whole company if no individual’s expenses cost more than $50,000.

The appeal of self-insurance is that if employees are generally healthy, chances are companies will save money.

But they have to understand the risk, said Valerie Bogdan-Powers, vice president of group operations for HORAN, an insurance brokerage company in Dayton and Cincinnati.

“Once you go self-funded, you own your claims and have to pay them,” she said. “Do they have good cash flow? Can they pay their bills?”

The larger the company, the more the numbers make sense with self-insurance, Bogdan-Powers said. The threshold has typically been around 100 employees, but changes in regulations are making smaller companies seriously consider the self-funded option.

The Affordable Care Act contains two main changes targeted at fully-insured companies, of which there are a lot in Dayton and Cincinnati, thanks to intense competition that has kept rates affordable, Bogdan-Powers said.

The first change involves additional taxes and fees that apply only to fully-insured companies, which were levied to help pay for the whole Affordable Care Act program. In Ohio there’s an additional tax that’s eliminated if a company chooses self-insurance.

The second change involves the way insurance companies are allowed to calculate insurance premiums. Currently companies can evaluate an employee’s health based on multiple risk factors, including medical history, current health conditions and gender, said Scott McGohan, CEO of Kettering-based McGohan Brabender. But under the Affordable Care Act, small employers — and there’s conflicting guidelines about what makes an employer small, but it’s around 50 employees — will be rated on four criteria only: age, zip code, family-size and tobacco usage. The law refers to this as community rating.

“We’ve gotten an estimate that about 40 percent of our groups will see a 50 percent increase (in premium costs) because you’re going to go to community rating,” Bogdan-Powers said. “You’ll get everyone to come to the center.”

McGohan said the community ratings are likely to be beneficial for companies whose employees skew older and less healthy, and be a significant cost increase for younger, healthier groups.

And that’s why some small employers are looking into self-insurance, when before it would have been cost-prohibitive.

Bogdan-Powers said HORAN has fielded many questions from smaller clients about self-insurance, with some making the decision to purchase it, since many of the major insurance providers are beginning to customize self-insurance programs to be more appropriate for small employers by lowering the emergency deductible.

But McGohan said he wouldn’t recommend it in most situations.

“It can go very well and it can go very badly,” McGohan said. “You should never enter into a self-funded arena for cash-flow purposes. Over the long haul you’ll save quite a bit, but there could be some years where it could affect your financials.”

There’s more than just cash-flow at risk as well, said David Whaley , a partner in Dinsmore and Shohl’s Cincinnati office.

Because you’re taking on the responsibility for administering the insurance program, you are held accountable for any promises concerning insurance coverage you make to your employees.

“If your administration, your language to employees creates a mistake that guarantees some level of benefits to employees not provided in the stop-loss coverage you purchased, you’re on the hook for those benefits,” Whaley said.

Mistakes like that happen more often than you would think, Whaley said, especially in verbal or e-mailed communication.

“It only matters whenever it gets into that area of massive amounts of dollars being incurred,” Whaley said. “The ones we see heavily litigated aren’t when the HR department extended a couple thousand dollars. It’s the Hollywood-esque cases of people running up bills of hundreds of thousands from extended diseases.”

But for groups that do choose to take the self-insurance route, there can be a positive benefit to the overall health of the organization, said Shelly Hodges, a benefit consultant for HORAN.

“There’s definitely more incentive for the employer to be engaged in the overall health of its employee base when you’re self-funded because behavior and utilization of employees directly impacts the costs of the plan,” she said.