Self‐Funding of Health‐Care Plans by Small Firms: Risks and Reforms

• Author: Robert Pozen,Anant Vinjamoori
• Date: 01 September 2015
• DOI: http://doi.org/10.1111/rmir.12046
• Published date: 01 September 2015

Risk Management and Insurance Review

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Risk Management and Insurance Review, 2015, Vol.18, No. 2, 243-254

DOI: 10.1111/rmir.12046

FEATURE ARTICLES

SELF-FUNDING OF HEALTH-CARE PLANS BY SMALL

FIRMS:RISKS AND REFORMS

Robert Pozen

Anant Vinjamoori

ABSTRACT

Small employers that offer health insurance have usually offered fully insured

products through traditional health plans. Recently, the Patient Protection and

Affordable Care Act (ACA) has created new requirements for fully insured

products that will entice more small firms to fund their own health-care ben-

efits. However, self-funding poses significant risks to these small firms, their

employees, and state exchanges. To mitigate some of these risks within current

political realities, we recommend advance disclosures—to small firms of ma-

terial changes in their stop-loss policies, and to their employees that premium

subsidies are available only on ACA exchanges. Wealso suggest strengthening

Small Business Health Options Program exchanges by broadening the availabil-

ity of subsidies and building partnerships with brokers. Finally,we recommend

an expanded role for brokers and third-party administrators in helping small

firms improve their choice of health-care insurance.

INTRODUCTION

In 2008, there were approximately 5 million firms with 100 or fewer full-time equiv-

alent (FTE) employees (US Census Bureau, 2014). These small firms were much less

likely to offer health-care insurance to their employees than larger firms. Approximately

54 percent of firms under 200 FTEs offer some type of health-care policy to their employ-

ees. By contrast, approximately 98 plus percent of firms above 100 FTEs offer health-care

insurance to their employees.

As to the type of health-care insurance, small firms can either purchase a policy from

a health plan, or fund health benefits themselves, a process known as “self-funding.”

Self-funding is not common among small firms. Just 8 percent of employers under

50 FTEs and 16 percent of employers with 50–100 FTEs self-fund their health benefits.

However, the percentage of firms that self-fund health insurance plans rises along with

the number of employees—58 percent of firms with 200–299 employees self-fund, with

Robert Pozen is a Senior Lecturer at MIT Sloan School of Management; phone: 617-470-2927;

fax: 617-929-7404; e-mail: bobpozen@mit.edu. Anant Vinjamoori worked on this article while

completing an MBA-MD at Harvard. He is currently a medical resident at the Brigham and

Women’s Hospital in Boston.

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