Risky Business

With the right kind of self-insurance, you can trim as much as 20% off your health insurance bills.

Tweet

Too much, Suzanne Green said when she added up the figures, and who could argue? The total was approximately $121,000 -- $36,000 more than Growth Enterprises Inc., a restaurant development company in Basking Ridge, N.J., had paid the previous year for its employees' health insurance coverage.

But it wasn't just the money that bothered Green, Growth Enterprises's administrative manager. She also objected to her insurance companies' policy of deciding which claims to pay and reject. "We were buying health care coverage," she explains, "but we had no control over how our money was being applied."

When she talked the matter over with Jeff Beers, one of Growth Enterprises's two owners, they resolved to do what they could about both problems. That is when the idea of self-insurance came up.

Green and Beers had read about self-insurance in the trade journals. Companies that self-insure, they learned, agree to pay a portion of employees' medical claims; amounts over that preset sum are covered by an outside insurance company. By self-insuring, Green and Beers discovered, some large corporations had trimmed millions of dollars off their health care costs.

They decided to find out if Growth Enterprises, a 12-year-old, $10-million-a-year concern, could also profit from the practice. Green contacted a couple of local insurance agents, asking if they knew anyone who could help the company evaluate a self-insurance program. One of them did, and he gave her the name of Comprehensive Benefits Services Co., a third-party claims administrator in Newtown Square, Pa.

Comprehensive Benefits concluded that Growth Enterprises was a "good group" to self-fund, since its employees fit the health care industry's description of low risk. "Being in the restaurant business," Green says, "our employees were young, and we didn't have a lot of families, young children, or older people to create financial problems for our plan."

So Green and Beers hired Comprehenive Benefits to administer a new self-insurance program. The next step was to project the cost of the new plan. There were 190 people participating in Growth Enterprises's plan; a quarter of them were waiters and waitresses who were not automatically covered by the plan but who had the option of participating at a cost of $30 a month. Using industry formulas, Comprehensive Benefits estimated Growth Enterprises's first-year costs would total $92,000 -- $60,000 for employees' medical claims, $5,000 for startup fees, $13,000 for administration, $12,000 for specific insurance, and $2,000 for "aggregate" insurance.

Specific and aggregate insurance are two types of stop-loss coverage that pay employees' medical bills when they exceed certain preset levels. Specific insurance limits the amount a company is obligated to pay for any one illness. In that way, it shields a company from the huge claims that sometimes result from the treatment of cancer, heart disease, and other "catastrophic" illnesses. Aggregate insurance restricts a business's total liability, meaningHit protects a company when total claims exceed projected levels.

Growth Enterprises purchased specific insurance that confines its liability for any one employee's medical claims to the first $20,000. The company's aggregate insurance policy kicks in when total claims exceed $95,000.

Green and Beers chose June 1, 1982, as the starting date of Growth Enterprises's plan. A year later, when they sat down to add up the numbers, they discovered that they had saved the company $29,000, and they had kept at $30 the monthly fee for workers who wish to participate in the plan but aren't automatically covered by it. What is more, they had enabled Growth Enterprises to gain control over its medical claims.

By self-insuring, the company could pay medical bills the insurance carriers occasionally refused to cover. "We had a young man at one of our restaurants who was going to donate an organ to one of his relatives," Green remembers. "Our insurance company's position was that it wasn't the employee who was ill, so his medical expenses would not be covered."

Now, the company can use its discretion and pay claims as it sees fit. "Previously, we didn't cover any kind of dental work in our plan," Green says, "but we had a young gal who had been a very good worker and needed a lot of dental surgery done. Under our new plan, we were able to use our discretion and say, yes, we want this covered, and we paid for it."

Still, last June, Green wasn't sure she wanted Growth Enterprises to undertake another year of self-funding. "I wanted to make sure we were still saving money," she says. And the best way to do that, she concluded, was to ask an insurance carrier how much it would charge to provide health care coverage for the 190 people covered by Growth Enterprises's plan. The insurance carrier responded -- $125,000.

So Growth Enterprises stuck with its self-insurance program -- even though Green and Beers knew their costs would go up. "We're anticipating," Green says of the fiscal year that started June 1, 1983, "about $108,000." That includes $30,000 for administration, $3,000 for aggregate insurance, and $75,000 for employees' medical claims.

Next June, she says, "we plan to go back out to the market and compare again. I don't think you can go along blindly with this kind of thing, put it in and say, 'Gee, this is going to work forever.' Self-insurance is not a panacea."

On that point, Green is right. Although self-insurance can help small companies get a grip on skyrocketing health care costs, it has its drawbacks Proponents of self-insurance argue that businesses will cut their health-insurance bills by an average of 15% to 20% by self-insuring. But a company's ability to cut costs depends on the number of people enrolled in a plan, the type of coverage provided, and the health and age of a plan's participants.

Additionally, there are certain types of companies that should avoid self-insurance. Corporations in poor financial condition, companies with cash-flow problems, and start-ups are key examples, since they are financially too shaky to guarantee that employees will actually receive the benefits due them. "Employees need to be assured that their benefits are going to be paid," says William W. Keffer, executive vice-president of Phoenix Mutual Life Insurance Co. in Hartford.

 1 | 2 | 3  NEXT