One of the definitions of insurance by Merriam-Webster is: a means of guaranteeing protection or safety.
Sometimes insurance policies protect the value of property, cover the expense of defending a lawsuit, or the expenses resulting from a cybersecurity breach. But when it comes to health insurance, the definition seems not to apply as clearly. Is this “insurance” in the Merriam-Webster form, or is it something else?
When significantly large claims occur in those above policies, your insurance company may choose not to renew, or at best, offer to renew at an increased premium. Usually, the amount of increase is paltry compared to the size of the loss. For example, rebuilding a house after a fire may cost $500,000. The homeowner’s insurance was $4,500, but the insurance company won’t raise the home owner’s premium by a factor of 100 the following year in order to be made whole.
Health Insurance does not operate quite the same way, starting with the underwriting process. Generally speaking 24 months of claims are analyzed and this analysis is used to project next year’s likely claim cost. Next year’s claim cost projection is then compared to the current actual claim cost. A profit margin is added, and the difference between the two results in the increase to the current premium.
If prior claims are used to create future rates, is a Health Insurance company really providing insurance to the business, or merely providing a “pay us later” option for an expense? Ultimately, an employer ends up paying for its own claims at some point. So, rather than waiting, and risk losing out on good claims experience, why not look at ways to take advantage of positive claim experience today?
For example, small businesses, even those with up to 100 employees, may not be large enough for traditional self-insurance. But if they buy a large deductible plan (in excess of $3,000-$4,000) and fund a portion of the deductible themselves, they can limit their downside while gaining a lower premium and lowered fixed cost. That only leaves in question the potential claims against the deductible funding. On average, its 40% of the total potential.
Medium sized businesses, those with upwards of 300 employees, uncomfortable with month-to-month cash flow fluctuations, but with some appetite for risk, can engage in a self-insured program with a fixed monthly “premium,” a portion of which funds a claims account. These type of plans allow for a dividend pay back should the claim spend be less than the claims account after a run-out period.
Traditional self-insurance is the best way to go for a medium sized business with higher risk tolerance, or a large employer who wants to take advantage of an alternatively funded program, and prefer a “pay now” approach with less margin given to the insurance company. Traditional self-insurance also allows for true medical plan risk management opportunities that simply aren’t available in fully insured arrangements.
For businesses of all sizes, there are a number of ways to get your health plan working more like traditional insurance. Work with an advisor who not only understands the many ways an alternatively funded program can benefit you, but also has significant experience successfully implementing and managing them.
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