Can You Cut Your Health-Care Costs by Self-Insuring?

Although the results of the health-insurance reform passed earlier this year will take years to fully work out, there’s one way your small business might be able to save on health insurance right now, reports CFO Magazine: Do what a growing number of small businesses are doing, and self-insure.

Large companies have used self-insurance for a long time, but until recently, the conventional wisdom held that was only a good fit for businesses with 1,000 or more employees.  But new data from PricewaterhouseCoopers shows the percentage of employers with fewer than 1,000 people that self-insure has risen from 29 percent in 2008 to 48 percent in 2010.

Here’s how self-insurance works: Rather than paying a monthly premium to an insurance company, your company agrees to pay for employees’ medical claims. As with insurance, you build some type of deductible or co-pay into the agreement, so the employee is paying some of the cost. Your company may still use an insurance company to administer some benefits, and may choose to get stop-loss insurance (which covers claims above a certain dollar amount and below a certain limit, so you can “cap” your costs).

One 95-person company cited in the article has saved money by paying claims compared to what it would have spent on premiums. Other benefits include avoiding state taxes and other costs that insurers usually pass on to you-and you also save because you’re not paying the insurance company’s profit margins.

Many small business owners like self-insurance because it allows them to design a plan that will save them money and fit with their employees’ needs. For instance, if most of your employees are in a certain age group or are women, you can tailor coverage to fit their most likely medical issues.

Is self-insurance for you? Well, it’s not a way to avoid dealing with health-care reform; you’ll still have to meet the requirements of the new law. And it’s not a good fit for companies that are planning a merger, expect layoffs or have fluctuating cash flow. But it does enable you to avoid certain regulations that come with dealing with insurance companies. Michael Thompson, a principal in PwC’s human-resource services group, says self-insurance typically results in long-term savings, but you have to be comfortable handling the short-term risk.

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