The Self-Insured Healthcare Trifecta: Trim Expenses, Sidestep Regulation, Defund Insurers
I was aware that self-insured health plans were popular with employers, but I didn't know just how fast they're growing -- or, more important, why -- until I happened across a recent American Medical News article that's a fascinating primer for a largely unheralded but major issue in the health-insurance industry. (The full text, unfortunately, requires a subscription.)
Bottom line: The plans save employers money, allow them to sidestep state insurance regulation, and generally stick it to traditional health insurers. Here's how.
A self-insured plan (sometimes also referred to as a self-funded plan) is a sort of DIY arrangement for companies that offer health benefits to their employees. The company basically hires a traditional health insurer to manage its health plan, but assumes the financial risk of providing health insurance itself. This arrangement essentially turns the insurer into a contractor that does little but process claims and oversee its network of doctors and hospitals. The employer, meanwhile, saves itself the profit margin that insurers build into their premiums, albeit at the risk of losing money if its employees rack up huge medical bills. Companies often reinsure themselves against this prospect.
The fact that employers can trim their healthcare costs is obviously one big reason self-insured plans have spread so quickly. According to the Kaiser Family Foundation, 55 percent of covered workers were in self-insured plans last year, up from just 44 percent eight years earlier (see exhibit 10.1 in that PDF link). Healthcare premiums have also tended to rise more slowly in self-insured plans (see exhibit 1.9).
It turns out, however, that self-insured plans are also exempt from many state regulations. That's because self-insured plans are regulated by federal employee-benefits law, which often -- although not always -- trumps state law. As AMNews' Emily Berry reports:
[S]tates have much less power to monitor, regulate or fine insurance programs that are only administered by health plans. Self-insured plans, also sometimes called self-funded, are generally regulated by ERISA, the federal Employee Retirement Income Security Act....
Once a health plan is serving as a TPA [third-party administrator], its dealings with doctors in some cases fall under federal rather than state rules. Federal rules in many areas give an employer more flexibility in coverage and in how benefits are handled. Recourse for physicians or patients who aren't served well by a self-insured plan are generally slower, and the potential remedies are often more limited....In practice, that means many large-employer health plans can sidestep state rules that determine, for instance, how quickly claims are processed or what sorts of conditions insurers must covered. Some states and the AMA itself -- which, of course, has its own self-interested beef with insurers -- are pushing back against federal pre-emption of state regulation, and have won a few victories in states like Ohio and Texas, where federal courts have rules that state "prompt payment" laws take priority over ERISA.
Of course, not everyone wins in self-insurance. As I've noted previously, self-insured plans are less profitable for big insurers like WellPoint and UnitedHealth Group, so the way self-insurance is gradually edging out traditional "fully insured" plans is yet another trend squeezing the dinosaurs of the industry.
For what it's worth, here are some of the other advantages of self-insured plans, as compiled by the Self-Insurance Institute of America:
- Health plans can be customized for the company's workforce;
- Employer holds the financial reserves, maximizing interest income;
- No pre-payment for treatment improves cash flow;
- Employer avoids state premium taxes (typically two to three percent).
