Who's afraid of self-insurance?

• Author: Carrara, Nicholas

Who's afraid of self-insurance? When the FASB proposed its OPEB (other postemployment benefits) standard, companies were forced to take a hard look at their health care expenditures. What they saw was a steady acceleration in their health care spending--for all employees, not just retirees. But some corporations believe they've hit upon a solution to the problem.

Scores of companies have switched to self-insuring as a cost containment measure. Allied Signal's recent move to self-insurance grabbed many headlines. Even municipalities have gone the self-insurance route and realized significant savings.

But while lots of employers are toying with the idea of self-insurance, many still shy away. The main reason is a simple lack of understanding of what self-insurance involves and its potential for large savings. Companies fear the risk, they fear the unknown, they fear the change.

And those reactions certainly are understandable. After all, paying premiums to a big, traditional health insurance carrier has an undeniable comfort level. But what is that warm, fuzzy feeling costing you?

The truth is that self-insurance can reduce the employee health benefit costs of large employers--and without curtailing the benefits package.

Some companies find that combining self-insurance with some form of managed care further magnifies the savings. In fact, employee health care costs can actually go down, not just level off or escalate more slowly.

So, how can you decide if self-insurance is workable for your firm?

First you need to understand what self-insurance is. Instead of paying premiums to a major carrier, you pay claims directly for your employees, buy an inexpensive "stop-loss" insurance policy as a backstop, and farm out claims processing. In a typical large employer group, the net savings will be about one-fourth of the premiums you paid over the past 12 months.

Mechanically, the task of processing claims isn't ordinarily done by your company. Rather, it is contracted out to third-party administrator firms, or TPAs. So there is no added administrative burden on your end. In fact, you could cut your administrative burden.

As for who can make the most of self-insurance, usually it pays off for only larger firms, those with 150 or more employees. Beyond that, a company's premium and claims history for the past few years is an important determinant. Here's an example: If a company pays a traditional insurer $1 million a year in premiums and submits...