Lawhorn says self-insurance is also a good way for companies to better target the benefits to participants. Her company, for example, covers some prescription drugs, such as growth hormones, that wouldn’t normally be covered by an insurance company.
Mid-City maintains some cash reserves to cover spikes in claims, and as a backup uses stop-loss insurance that kicks in both when an individual reaches a certain limit and when the aggregate volume of claims hits a larger limit. “We’ve never hit the aggregate limit, but it helps you sleep better at night knowing it’s there,” says Lawhorn.
Stop-loss insurance can be proportionately pricey for a small company, so some are looking at purchasing it as a consortium. The notion of a group stop-loss program is attractive to Jim Knutson, risk manager at Aircraft Gear Corp., a self-insuring car-parts maker in Illinois with about 100 employees and 300 covered people. “We have not had stop-loss for several years, but with new possibilities in the market, we expect to have it again soon,” he says.
To be sure, self-insurance does not completely shield a company from the ups and downs of medical-market trends. After five years of holding medical expenses flat, Lawhorn is expecting to see an increase of more than 25% in the coming year and following years, thanks to higher reinsurance rates and higher charges from health-care providers. “There’s so much uncertainty about health-care reform, [both insurers and providers] are trying to capture as much revenue as possible in the next four years [before the full impact of reform kicks in],” she says.
On average, stop-loss rate increases were “running in the upper teens to low 20s this spring” before adjustments that would somewhat lower the effective rates, says Carl Austin, assistant vice president at A.M. Best, which provides credit ratings for insurance companies. So far there’s “no firm evidence” that the increases will abate, although most carriers expect “the worst is over,” he adds.
Still, Lawhorn says, “I think self-insurance is the one thing that’s helping us, by allowing us to be more strategic with plan design and the cost-sharing structure.”
Occasionally, insurers will offer great deals to entice companies they deem as good risks back into their pools, says Thompson, something that can make switching an attractive option in the short term. Over the long run, though, self-funding will beat any deal insurers can offer, he says. “The question is, can the company absorb the risk in the short run?” says Thompson.
Which companies should not consider self-insurance? Those in industries where cash flows are scarce or unpredictable, for starters. Companies with big changes in the works, such as a major layoff or acquisition, should also refrain, since reshaping the employee group can change the cost dynamics.