Why Self-Insurance Is Dangerous for Entrepreneurs
The confusion over the Affordable Care Act--and for some small businesses, the higher premiums caused by it--is causing some of entrepreneurs to take another look at an option that's long been used mostly by large companies: self-insurance.
If you were to self-insure, you'd essentially be taking the money you'd otherwise pay in health insurance premiums and setting it aside to cover your employees' healthcare costs directly. To protect against a catastrophic loss, you'd buy reinsurance. Until you hit a spending level that triggers the reinsurance, you're vulnerable to swings in your employees' health status, and the medical bills that accompany such changes. For self-insurance to be even remotely feasible, you have to be convinced that your healthcare costs, as an employer, are going to be extremely stable.
If the idea of self-insuring your healthcare costs sounds dangerous to you, you're not wrong. "I really don’t think self-insurance is a good idea for small firms," says Linda Blumberg, a senior fellow in the health policy center of the Urban Institute. "If you’re below 250 employees and you self-insure, you're in pretty dangerous waters. Once you're in the 50-employees-and-below category, you've got no business thinking about it at all."
But Blumberg still says she's hearing of companies with as few as 10 employees seriously considering the self-insurance route. "It is a much bigger and riskier decision than I think a lot of brokers and private reinsurers are letting on," she says.
Why is that? In many ways, it comes down to the market for reiunsurance. Reinsurance, unlike regular health insurance, is mostly unregulated in most states. There is no guaranteed-issue (instead, a reinsurer can refuse to insure you), guaranteed-renewal (a reinsurer can refuse to renew your policy) , as there now is with other health insurance. Instead, braving the reinsurance market can be like a trip back to the bad old days, when a company or individual can lose coverage abruptly if their health status or type of claims changes. Of course, the terms of your particular contract with a reinsurer could be much more favorable--but they don't have to be.
And the exchanges don't provide as strong a safety net as you might think. Say you do decide to reinsure, and you get dropped by your reinsurer in 2014. "No problem," you might think. "I'll just buy insurance on the exchanges in 2015."
It's not quite that simple, says Blumberg. There can be a delay between when the reinsurer drops you and when you’re able to buy insurance on the exchanges. As a company, you'll be responsible for claims filed in that window. Even if you don't think there will be much of a time lag, health care providers don't always bill promptly. If employees run up healthcare bills in 2014 but those claims aren't filed until 2015, you'll be on the hook for them.
"There is a lot of serious financial liability that goes along with proclaiming yourself to be an insurer," says Blumberg. "I don’t think a lot of companies understand what the risks are."