Self-Insured Health Plans May Be Worth Considering

For a growing number of employers, health care costs continue to rise while options for providing coverage continue to dwindle.

Nowhere is that truer than in the construction industry, where the cost of health care plans has grown so high that only about half of today’s companies provide any type of companywide coverage. At those companies that don’t offer some type of coverage, their ability to compete is diminishing. The best workers increasingly are moving to those companies that do offer some type of health care.

In truth, no contractor should be forced to close its doors due to health insurance issues. Today there are many ways that some type of coverage can be provided, including some nontraditional methods. For example, many state construction industry trade associations now offer plans. They usually are designed for contractors employing two to fifty workers and carry relatively affordable premium charges.  Another option for contractors is the Health Savings Account. Under this plan, owners of contracting firms and their employees can make pre-tax contributions to a health savings account that are then used to help pay for medical care costs under high-deductible plans. For 2008, a high-deductible plan is defined as a plan with a minimum annual deductible of at least $1,100 for self-only coverage and $2,200 for family coverage. It is a way to help control overall costs in a plan by having employees share in more of the costs.

Self Insurance

Another option that is gaining popularity is self insurance. As it implies, this type of program allows a contracting company to set its own health care parameters based on need and affordability. Some contractors are finding that self-insured arrangements can cost up to 25 percent less than premiums under a conventional indemnity coverage health care plan.

Self insurance has several different forms. In the past, entities may have formed an “association” for the purpose of designing a self-insured health program. By joining together, companies were able to spread the costs and risks of a plan. However, history shows associations work well only until claim costs rise and stop-loss insurance premiums increase. At this point, the companies with lower medical care claims tend to opt out of the association.

In recent years, contractors have been more likely to design their own self-insured health plan by working with an insurance company and third-party plan administrator. In these cases, the contractors believe that their actual claims-paid versus premiums-paid ratio will be favorable. Such plans can be designed either with the employer paying all of the health care claims, or with the employee paying a monthly premium as determined by the company with input from the insurance company and administrator. To help manage the risk associated with such plans, the company will usually purchase stop-loss insurance to cover catastrophic claims that could cripple the contractor if they had to pay the entire cost of the claim. The stop-loss coverage would begin covering the cost of the claim at a predetermined amount—when the cost of the claim reaches $50,000 or $100,000 or more, depending on the risk the contractor is willing to assume.

How to Set Up a Self-Insured Plan

A self-insured plan can be administered in several ways. Typically, a bank account is established and funded by the contractor and, if desired, with employee contributions in the form of premiums charged by the contractor. A third-party insurance administrator (which can be an insurance company) receives all the medical claims and reviews the charges for appropriateness based on contractual agreements with the providers. The amount needed to pay the claims is drawn from the bank account on a periodic basis, usually weekly or monthly. 

Self insurance, because it is tailored to each contractor’s needs and ability to pay, can be a less expensive way to provide health care coverage. However, it isn’t for all contractors. In particular, it may not work well for small companies that do not have a lot of employees to share the costs and risks. The larger a company, the less expensive it becomes for each worker. In general, self insurance is recommended for companies that employ at least 200 workers and have relatively low turnover.

It should be noted, however, that self insurance can prove crippling to any contractor if an inordinate number of large claims are filed in a single year. That’s why all companies need to closely analyze the demographics and health care histories of their employees before self insuring.  Similar to safety plans contractors implement to reduce worker’s comp claims, wellness plans can be implemented to help minimize the overall cost of the self-insured health plan.

What You Should Know About Self Insuring

For those considering the possibility of self insuring, there are a few key accounting and tax issues that need to be understood.  For financial reporting purposes, the company will need to record an accrual at month- and year-end related to that period’s health care costs.  Those costs include reported claims for which the administrator has begun processing for payment, and claims incurred but not reported (IBNR). IBNR claims are estimates of claims incurred during the reporting period but not known or reported until a later period. Obviously, this can add to the complexity of reporting self-insured activities.  Additionally, the tax deductibility of such self-insured claims accrued at year-end but not paid until after year-end should be reviewed with your tax professional.

The choice of the insurance company or third-party administrator is critical to any contractor who wants to self insure. Besides the requisite experience needed to advise and administer a self-insured plan, the insurance company or third-party administrator should have an annual audit of its procedures and internal controls. Such reports are typically referred to in auditing literature as Type II SAS 70 reports. These reports provide the company and its employees assurance that claims are being processed and paid in accordance with sound internal controls procedures that are operating effectively.

Before making the decision to self insure, contractors need to talk to their accountant, insurance advisor and attorney. Although savings certainly can result from such plans, there are increased risks and additional administrative costs that come with self insurance. Contractors need to make certain they understand all sides before enacting self insurance as a health care option.

Construction Business Owner, August 2008