One of the most important HR issues for small businesses today is managing health care costs. While alternative insurance models have long been available to companies, the popular self-funded
model historically appealed to larger companies alone. Now, with health care reform and the availability of broader policies better suited to smaller companies, self-funding is a viable and
increasingly popular model for the country's smaller employers.
Why Self-Funding Now?
Self-funded health care insurance plans offer an alternative that can allow small businesses to reduce and manage their employee health care costs while still delivering the health coverage
that their workforce demands. In a self-funding model, the company is responsible for covering all claims in the health care plan. While workers continue to pay premiums and deductibles, the
employer agrees to cover claims up to a certain level based on the total number of anticipated claims over one year. This allows organizations to limit their maximum exposure or risk to
costs. However, when claims exceed that point, employers would be liable if they could not purchase stop-loss policies that reimburse the company for costs associated with catastrophic claims
or higher levels of claims.
It is the ability to purchase stop-loss policies that mitigates much of the risk for self-funded businesses. While stop-loss policies have been available for some time, the health care reform
legislation has influenced the market, allowing stop-loss providers to offer coverage to smaller companies. In fact, historically companies with fewer than 75 workers were unable to pursue a
self-funded model because stop-loss policies were not available for them. Now, providers are offering coverage to companies with as few as five employees.
The self-funded business model has also been more common among large companies because their claims risk can be spread over a broader employee population. With small companies, the risk is
higher because one major unexpected claim could present significant financial consequences.
The coinciding factors of rising health care costs with changes in policies due to health care reform means more small companies are turning to a self-funded business model. In fact,
according to the Aflac WorkForces Report, 61 percent of small businesses with fewer than 100 employees are self-funded, 44 percent of which net less than 5 million in total revenue.*
61% of small businesses with fewer than 100 employees are self-funded.
Additional Ways to Effectively Mitigate Risk
Voluntary Benefits Offer "Insurance" for Self-Funded Models
As more small businesses turn to self-funded models, voluntary benefit solutions are yet another means of lowering the risk of their self-insured medical plan. Voluntary benefits, also called
supplemental coverage, represent a variety of insurance policies made available to and paid for by employees as a voluntary option.
These plans provide a wide range of coverage choices, including short-term disability, life, dental, and vision. But perhaps most relevant to self-funded companies are voluntary critical
illness, hospital indemnity and accident plans that can provide much-needed cash benefits to policyholders faced with high out-of-pocket expenses associated with these health events.
For example, a business composed of an employee population made up largely of young females may decide to lower the out-of-pocket expenses relating to pre-natal care as a way to reduce the
number of at-risk pregnancies-a goal that not only helps safeguard against high medical costs but that also helps to promote the medical plan within the organization. Similarly, the same
company can further reduce the cost to the plan by increasing the out-of-pocket limits for certain events, such as prostate cancer, while offering voluntary insurance plans as a way for
employees to retain adequate insurance and financial protection.
Many companies that are making voluntary plans available are also seeing reduced worker compensation costs. Nearly 3 in 10 of these businesses say they have found a correlation between their
voluntary offerings and reducing their risk of workers' compensation claims. Twenty-five percent of companies currently offer voluntary insurance benefits. Of those, 30 percent experienced
lower workers' compensation claims since they began offering voluntary insurance plans.*
Many benefits decision-makers rest easier at night knowing they have the option of earmarking the cost savings they achieve through high-deductible components of their medical plan to offset
higher-than-expected claim activity in a given year while having the confidence that the voluntary benefits they have in place will help provide protection for their valued employees and only
enhance their overall benefits program.
Nearly 3 in 10 businesses offering voluntary options say they have found a correlation between their voluntary offerings and reducing their risk of workers' compensation claims.
Effective Data Gathering, Health-Risk Assessments
Particularly considering the smaller number of employees, small companies benefit greatly from conducting health-risk assessments to provide insight into the overall health, potential health
risks, and demographics of the employee population. This exercise is tremendously valuable in helping companies select the appropriate coverage package that will minimize their costs.
The right data gathering combined with low turnover of workers helps maintain the right level of coverage and health plans for the organization. It also allows the company to make better
decisions about the potential savings it receives from unpaid claims. For example, some businesses choose to save that money as a reserve to cover unexpected costs while others choose to write
it off as a cost savings to improve the bottom line.
Utilize Wellness Initiatives to Lower Claims, Premiums for Workers
Implementing wellness programs can deliver cost savings to the company and the employee. Some smaller organizations offer incentives in the form of reduced monthly premiums for things like
quitting smoking, losing weight or lowering their cholesterol levels, all of which also improve the employer's bottom line considering that often it is a smaller percentage of workers who are
unhealthy but who can impact the majority of health claim costs.
By focusing on changing the behavior and lifestyle of high-risk employees, the risk of catastrophic claim costs is minimized. Some smaller organizations have even provided staff nurses or
doctors at the worksite who can better manage the employee population and curb more serious trips to the ER or hospital.
Employers of all sizes these days are seeking ways to control spiraling health care costs. But for smaller organizations, a new effective alternative to traditionally funded health care plans
is up for consideration. Although on the surface, the idea of self-funding for smaller companies seems counterintuitive given the assumption of more risk, the reality is that this new health
care model is proving to help control costs, to deliver valuable and expected benefits to workers, and ultimately to improve the bottom line.
* 2012 Aflac WorkForces Report, a national study conducted by Research Now on behalf of Aflac, February 2012.