How do you manage what's typically the second- or third-most costly line item expense for smaller businesses today—if you can't measure those items?
Smaller employers' inability to obtain useful, readily available data has allowed premiums to go uncontested far too long. Premiums have risen 131 percent during the past 10 years. In contrast, wages have grown 38 percent, and inflation is up 28 percent, according to the Kaiser Family Foundation.
What's surprising is that most health insurance brokers have not suggested self-funding to clients as a way to gain transparency. This simple solution can help smaller businesses better manage medical costs.
Benefits include identifying overcharging and less expensive treatments that can help lower total medical benefit costs. Bottom line: It places smaller businesses in the driver's seat.
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Post-Affordable Care Act
In the post-Affordable Care Act (ACA) world, health insurance rates in the smaller group market (typically companies with fewer than 200 employees) are projected to continue rising. Rates are projected to rise 50 percent or more next year, as indicated in recent testimony before the House Committee on Small Business.
The trend to self-insurance is gaining momentum fueled by ACA's framework, which is expected to add significant costs to fully insured plans. For example, the new health insurance tax will add 2 percent to premiums in 2014. Meanwhile, a broad range of added benefits that fall under the "new minimum coverage requirement" for employers with 50 or more workers will increase premiums by 3 percent to 17 percent, as highlighted in a recent Milliman study.
Because such projected increases don't apply to self-funded plans, they will remain lower than fully insured ones. Moreover, self-funded plans are not subject to state benefit mandates and premium taxes. While introducing these expensive mandates into the commercial health insurance marketplace, Congress decided not to disrupt self-insurance—viewed as working well—and exempted self-funded arrangements from many of the ACA's requirements.
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Alternative Options to Consider
In light of widespread uncertainty, many entrepreneurs, small business owners and their brokers are considering an early switch to self-funding by terminating their current insurance policy before the 2014 effective date.
This approach not only will allow small businesses to take advantage of favorable ACA incentives and protect them from costly requirements. And with important, analyzed data, employers can understand their population for actionable solutions.
"Being self-insured would let smaller businesses avoid new requirements under the law that call for plans to include richer benefits," according to a recent article in The Wall Street Journal, "Rx for Health Law: Self Insure." It states that "self-insured companies can also avoid changes to pricing rules that could increase costs for groups of healthy workers."
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Health Costs Are No. 1 Problem
Smaller businesses have long said that their primary concern is controlling the spiraling annual cost of health coverage. Recent surveys find that small firms' insurance premiums are 18 percent higher than those of larger companies.
Higher premiums are driven by increased medical costs and administrative loads, including insurer profits.
It's not surprising, then, that nearly 80 million people—an all-time high—received health benefits through a self-insured plan last year. That means a record 60 percent of workers under 65 are covered by a self-funded plan–the number in smaller firms (3 to 199 employees) increased to 15 percent in 2012, up from 10 percent in 2003, according to Kaiser.
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Insurers have worked hard to keep employers in the dark about what's going on inside their health plans. In the past, lacking detailed data, smaller employers have been forced to accept heavy premium increases year after year.
Technology solutions have been developed over the past few years that make self-funding of small business easier and less complicated. Companies have bundled medical benefit components, network access, stop-loss insurance, third-party administration and a variety of plan designs that include analytics, wellness and health coaching to make it easier for smaller businesses to compare costs and understand self-funding programs.
Escalating costs represent one of the most predictable outcomes of health reform. As employers face higher plan costs, many will turn to alternative solutions such as self-insurance to better manage plans and control expenses.
The self-insurance has been the funding method of choice for larger employers for years, it has become an increasingly popular option for smaller and midsize employers. The trend has been gradual but reflects a growing awareness by forward-thinking smaller employers of the importance of finally putting themselves in the driver's seat.
Keith Lemer is the president of WellNet Healthcare, in Bethesda, Md. The company offers alternative solutions to traditional health insurance carriers. He's also a member of the CNBC-YPO Chief Executive Network.
CNBC and YPO (Young Presidents' Organization) have an exclusive editorial partnership. A key component of this partnership is regional Chief Executive Networks in the Americas, EMEA and Asia-Pacific. These networks are made up of cross-sections of YPO's unrivaled global membership of 20,000 top executives on the frontlines of the economy, running companies that collectively generate $6 trillion in annual revenues and employ 15 million people in more than 120 countries.