Instead of buying a health insurance policy to cover their workers, a growing number of small and midsized companies are opting to pay their employees’ medical claims directly, a potentially riskier practice financially called self-insuring, a recent study found.
Between 2013 and 2015, the proportion of midsized companies with 100 to 499 employees that were self-insured increased 19 percent, to 30.1 percent, according to the analysis published in July by the Employee Benefit Research Institute. The percentage of small firms with fewer than 100 employees that self-funded their health plans grew 7 percent, to 14.2 percent, the study found. Meanwhile, self-funding by large companies declined slightly, to 80.4 percent.
For the study, researchers analyzed survey data from nearly 40,000 employers that participated in the U.S. Census Bureau’s Medical Expenditure Panel Survey Insurance/Employer Component.
“The expectation was the Affordable Care Act would drive more midsized and smaller employers in this direction,” said Paul Fronstin, director of EBRI’s health research and education program. “I think it’s interesting that what we expected to see is finally showing up.”
Starting in 2014, the health law imposed new coverage and cost requirements on health plans. But some of the changes don’t apply to companies that self-fund. For example, policies sold to companies in the small group market — in most states, defined as companies with fewer than 50 workers — are required to cover 10 so-called essential health benefits and are restricted in how much they can raise premiums based on age or tobacco use. Self-funded plans don’t have to comply with those requirements. They also avoid most federal and state taxes on health plan premiums to health insurers.
Most large companies self-fund their health plans rather than buy policies from insurers. Doing so gives them more flexibility to tailor their benefits for their workforce, and to reduce their total outlay because they don’t have to absorb marketing and other costs that are built into health insurers’ products. (For workers, the coverage generally appears no different whether a company self-insures or buys insurance.)
But any savings a company might achieve come with financial risks. Employers that self-fund typically buy stop-loss insurance to protect them if employees have higher-than-expected health care claims. But such coverage isn’t guaranteed and may only be available to firms with healthier employees, said John Arensmeyer, CEO of the Small Business Majority, an advocacy group that focuses on companies with fewer than 100 workers.
“Our concern is, is it really appropriate for a business of that size to be taking the risk?” Arensmeyer said. “They’re simply taking themselves out of the rules of the ACA, creating an imbalance in the market.”
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