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.
Keffer is not alone in his thinking. "You may have read about people who thought they were getting coverage but weren't," notes Michael Kahn, director of marketing for CIGNA Corp.'s group insurance division in Hartford. "George goes to the doctor, runs up big doctor bills, submits the claim, and, lo and behold, finds there is no money. That can happen.'
Two other dangers inherent in self-funding are stop-loss coverage and the tax treatment of funds set aside to cover health care claims. "When you self-insure," explains Robert S. McCoy Jr., a tax partner in the Denver office of Price Waterhouse, "the accountants make you put a reserve on the books to cover claims that will be submitted. That reserve is not deductible until the claims are actually paid out."
The problem with stop-loss policies is that most can be canceled at any time. Traditional health insurance, on the other hand, can be terminated only when the number of participants slips below a stated level. "It is true that these programs are generally one-year renewable arrangements," says Keffer of Phoenix Mutual, a company that writes stop-loss policies. "The [self-insured] employer," protection that would come from state laws that require insurers to stay on a risk." Notes Kahn of CIGNA, "We can't back off an account just because our experience is sour. Stop-loss carriers can say, 'I'm sorry. We won't write your business anymore."
Still, it is easy to understand why companies jump at self-insurance: It enables them to slash their healtn care bills by 10% to 33%. "Our former insurance company wanted a 29% premium increase," says Bud Tallman, vice-president of administration for Rosenbluth Travel Agency Inc., an agency in Philadelphia with about 400 employees, which switched to self-insurance last March. "That's when we decided to pay for medical costs ourselves. We expect to save $35,000, and employees don't even see a difference."
Another reason companies are eager to try self-insurance, says Joel F. Levy, a partner in the New York office of the accounting firm of Coopers & Lybrand, is that fringe-benefit costs now equal about 40% of payroll, twice the 1950 rate. To make matters worse, health care costs are escalating dramatically. In 1982 alone, they jumped 11.9%, compared to a modest 3.9% rise in the consumer price index.
The inflationary pressures of Medicaid and Medicare, hefty malpractice claims, expensive new medical treatments, and the fact that people are living longer all contribute to the increasing costs. But so does business. "The group health insurance identification card," says Niels H. Nielsen, president of Princeton Management Consultants Inc., in Princeton, N.J., "has become like a credit card which allows employees and their dependents to spend money at hospitals, doctors' or dentists' offices, and drug stores."
With regular insurance, only 75% to 85% of every premium dollar goes to pay employees' medical claims. The remaining 15% to 25% is earmarked for a grab bag of other fees -- profits, administration, and risk and pooling charges. There is even a premium tax levied at the state level (usually about 2%) that is passed on to the customer by the insurance carrier.
With self-insurance, many of these charges are eliminated. Premium taxes, for example, are cut out entirely, and so is the profit or contribution to surplus. Administration fees continue, however, and there is the cost of stop-loss insurance to consider. Also, money must still be set aside as claims reserves (which differ somewhat from the reserves that an insurance company must set aside), but interest on those funds is paid to the company rather than the insurance carrier. In its 1982 fiscal year, Growth Enterprises pocketed nearly $1,000 in interest on its claim reserves.
The most extreme form of self-insurance is 100% self-funding. In such cases, companies pay all the claims and assume all the risks. But that isn't practical, even for the largest employers, because of the hefty medical claims that result from "catastrophic" illness.The best option for small and medium-size companies is limited self-funding, coupled with outside administration -- in short, the type of program in place at Growth Enterprises.
How large does a company need to be to benefit from self-funding? Robert P. Brook, director of Ernst & Whinney's National Alternative Delivery System Consulting Group, based in San Francisco, and Richard E. Freiburger, a vice-president of The Equitable Life Assurance Society of the United States, suggest that corporations should have 400 to 500 employees. But others argue that companies with as few as 100 workers can successfully institute a limited form of self-insurance.
Another issue for debate is how self-insured companies should handle claims. Companies can pay the claims themselves, hire an insurance company to pay them, or employ a third-party administrator. Small and medium-size businesses, experts agree, should not handle their own claims.
"This kind of work requires special expertise," says Nielsen of Princeton Management Consultants. "Employees have to be recruited and trained, and inevitably there is turnover. There [also] is the danger that employees who are handling the claims will be subject to pressures from their fellow employees to bend the rules. [And] there is the problem of confidentiality." Green of Growth Enterprises agrees. "We're not experts. There's no way I could look at a $12,000 hospital bill and determine if the charges are appropriate."
Still another reason to employ an insurance carrier or hire an outside administrator is the paperwork requirements. Insurance companies and, often, administrators will automatically forward to employees the annual financial statements they are entitled to receive by law They also will send required reports to the U.S. Department of Labor and the Internal Revenue Service. (Bear in mind, however, that the self-insuring company, which is the plan administrator, remains the solely responsible fiduciary.)
Which is best? An insurance carrier or an administrator? Green of Growth Enterprises, Tallman of Rosenbluth Travel, and Nielsen of Princeton Management recommend a third-party administrator. "You can establish a much closer working relationship with a third-party administrator. It's not a large conglomerate, like an insurance company," says Green. Notes Nielsen: "[Third-party administrators] do most of the things that insurance companies do -- but often better. They have staffs of claim specialists who in the insurance companies would be supervisors rather than clerks. Some use registered nurses as claims processors and doctors as supervisors."
The cost of employing a third-party administrator varies, but the key elements in the formula are the number of people participating in a company's health plan and the type of coverage provided. A company that covers 275 workers' medical, dental, and eye care costs most likely will pay more per employee for administrative services than a company with 400 workers and a more simple plan.
As a rule, though, fees are levied on a monthly, per-employee basis. Generally, companies with 50 to 250 workers pay $4.50 to $6 per month per employee, says Richard J. Cusack, a marketing consultant with C. W. Burke & Co., a third-party administrator in Philadelphia. Businesses with more than 250 employees usually pay a lower per-capita fee. Growth Enterprises pays $5 a month for each of its 190 covered employees.
Whether you hire an administrator or an insurance carrier to handle your medical claims, you should insist on timely, complete monthly reports. Additionally, ask for information on claims, eligibility, diagnoses, the length of hospitalization, costs, and providers (the names of hospitals, doctors, and dentists rendering services). "This information gives management the facts it needs to make decisions on how to tighten up costs," says Nielsen. "Even more significant, these data are among the most important facts needed to make objective decisions on what changes to make in stop-loss insurance and in plan design."
Also, consider using a 501 (c)(9) trust for your self-insurance plan, as Growth Enterprises did. 501 (c)(9) refers to a subsection of the Internal Revenue Code and is similar to a trust set aside for a pension plan. Money deposited in a 501 (c)(9) trust is almost always exempt from state premium taxes. More important, funds in the trust are deductible at the time they are deposited.
"One major advantage if a company goes the tax-exempt trust route," explains Ted Nussbaum, senior consultant in Coopers & Lybrand's New York office, "is that a company can use a 501 (c)(9) trust to accelerate payments to the plan. As we go into 1985, you can prepay your 1985 contributions. That way you get a double deduction in 1984 -- one for your 1984 contribution, and one for your 1985 contribution."
Finally, don't worry that employees won't like self-funding: Clearly, attitudes are changing. For example, a survey released last fall by Equitable and conducted by Louis Harris & Associates Inc. shows that the majority of Americans are willing to accept changes in their health care coverage that are designed to reduce costs. Specifically, 65% of those surveyed said it would be acceptable to require employees to pay part of their health insurance premiums; 58% would accept higher deductibles than they now have in their insurance policies; and 52% find it acceptable to require patients to pay a larger share of their medical expenses covered by health insurance.
"From the employee's point of view, it's really irrelevant as to how the insurance is funded," says Dennis B. McKoy, a vice-president at Johnson & Higgins, an employee-benefits consulting and insurance brokerage firm in New York City. "The employees' real concern is, Whar does it cost, and what's in it for me?"