Easing The Burden
Entrepreneurs are increasingly considering self-funding of their health plans as a way to control costs. To help understand when and how to do this, BusinessWeek SmallBiz correspondent Amy Barrett spoke with Gary Kushner, CEO of Kushner & Co., a national employee benefits consulting firm in Portage, Mich.
What exactly is self-funding?
We are really talking about partial self-funding. That's when a company pays most employee health-care expenses itself, and buys coverage to protect against very large claims. That stop-loss coverage, plus the cost of having someone administer the plan, might be 15% to 30% of what a company would otherwise pay in premiums.
Why is self-funding growing in popularity?
Two reasons. In most states, employers with fewer than 100 workers are usually community-rated, and then those rates are tweaked based on your actual health-care use and the demographics of your group. That means you're lumped in with other employers of your size when you're first given a rate. So if you have a healthier workforce, you're paying a higher rate than you should.
If you self-fund, you can comply with a federal law called ERISA [Employee Retirement Income Security Act] rather than the mandates in your state. Most find ERISA less onerous.
Isn't self-funding risky?
The old wives' tale was that you didn't think about self-funding if you had fewer than 100 employees. But we have found companies with 25 or 30 employees that were able to do partial self-funding. If you have only 15 employees, you may save money. But the savings will probably be small compared with the risk you are taking.
How do I determine if self-funding is feasible?
Start by looking at the demographics of your employees. If you have 35 workers, and they're mostly over 40, maybe this is not for you. But I'll put an asterisk there. Because if all your employees are healthy and fit, you might want to consider it.
How do I know how healthy my employees are?
There are vendors that do health-risk assessments. They can give you aggregated data about your employees. Some programs cost as little as a few dollars per employee per year, and others are many times that.
What other data should a business owner look at?
If you're able to get it, you should look at your company's experience from your current carrier. But many carriers won't give that information to a company that's community-rated. Still, it is your data, and you're paying for it. Sometimes making a bit of a fuss can help. Then compare how the spending for your group is going up vs. your premiums.
What if I can't get the claims data?
Then you should look at your premium increases over the past three to five years and compare those to general health-care trends data for your city and region. If the premium increases are outstripping the wider spending trends, this may tell you that your group's claims may be higher than average. In that case, I would be wary of self-funding, because the data may indicate that your employees are spending more on health care. But if your premiums are going up less than health-care spending, then you may be able to take advantage of partial self-funding.
How do you make sure it's not just the sicker employees who sign up for the plan?
You need a large risk pool where people without claims help pay for the people with claims. If only a few employees sign up, you probably shouldn't offer the plan.
But aren't the younger, healthier single people likely to opt out if they're not making much money?
AIn that case, you may want to pay 90% or 95% of the cost of the plan for single coverage. Even though those employees are paying only 5% or 10%, it's better than not having them in the plan at all.