Once reserved primarily for large employers, self-funding benefits is gaining popularity among small and midsize firms that have become frustrated by years of premium hikes in the insured market that have increased costs by double digits.

By self-funding employees' health care expenses, employers save money by avoiding payment of state insurance premium taxes and becoming exempt from costly state mandates. They also have greater flexibility in plan design and have ready access to claims data so they can make informed decisions about where to direct cost-containment efforts.

But self-funding also can expose employers to catastrophic claims, and requires compliance with the Employee Retirement Income Security Act.

Employers can tap stop-loss insurance, a form of reinsurance that caps liability for large claims, to help reduce this risk. And brokers and consultants that traditionally catered to mostly large employers are more willing to entertain the needs of smaller and middle-market clients as they move to self-funding, a switch that many group insurance experts expect will accelerate with implementation of federal health care reform.

As insurers separate commissions from premiums to meet new minimum medical loss ratio requirements set by the Patient Protection and Affordable Care Act, brokers are being forced to switch to fee-based compensation. To justify their pay, many brokers are offering self-funded alternatives.

“We can sell it as a better way to control costs and be more conscientious of wellness. At the same time, the client is looking for more transparency and control,” said Paul Shaheen, vp at Chicago-based Horton Group, where about half of its employer clients with 150 or fewer employees self-insure.

While 82.1% of employers with 500 or more employees self-insure their health benefits, just 25.7% of firms with 100 to 499 employees do so, and only 13.5% of those with fewer than 100 employees self-fund, the U.S. Department of Health and Human Services said in a recent report to Congress.

But the percentage of smaller and midsize self-insured employers could grow if attractively priced stop-loss coverage at lower attachment points were to become widely available, the report said.

That already is occurring, according to a recent survey by Wilton, Conn.-based D.W. Van Dyke & Co. Inc. showing a more than 10% jump in the sales of stop-loss coverage this year over last year. It was the largest increase in medical stop-loss purchases since DWVD & Co. began tracking them in 2002.

“There is no question we are seeing clear signs that self-funding is currently in a growth mode and has been for the past year,” DWVD & Co. President Chris Koehler said in a statement.

Brokers, consultants and third-party administrators across the country say they are fielding more calls from employers nationwide—some with as few as 50 employees—that are interested in benefits self-funding.

“At this point in time, health reform is the biggest driver of the growth of the self-insurance market,” said Marie Harshbarger, U.S. midmarket segment leader at Aon Hewitt Inc. in Chicago. “Before, it was just negotiating their renewals and tweaking the plans or cost-sharing. Now it's expanding beyond that. Employers are looking at their options.”

Self-funding benefits “is rapidly expanding. It's been one of our fastest-growing products,” said Christopher DeRosa, Irvine, Calif.-based regional vp at CIGNA Corp., which offers programs tailored to small and midsize employers.

“We're adding about 10 employers a month in the 200-and-under group life market,” said Marty Joseph, president of Benefit Administrative Systems L.L.C., a Homewood, Ill.-based TPA. “Employers are frustrated with the rate increases from carriers on the fully insured side.”

“There's never been a more active period in recent history driving interest in self-funding” than the past six months, said Mike Ferguson, chief operating officer of the Self-Insurance Institute of America Inc. in Greenville, S.C. Most of SIIA's employer membership is middle-market companies with 200 to 1,000 employees, he said.

Even small and midsize employers in California, where fully insured health maintenance organizations have controlled the market for decades, are showing interest in benefits self-funding, according to HealthLeaders-InterStudy's recent California Health Plan Analysis.

With HMO premiums rising, “a lot more small and middle-market employers are kicking the tires on self-insurance,” said the study's author, Chris Lewis, senior market analyst at HealthLeaders-Interstudy based in Nashville, Tenn.

Michael Reid, director of operations and client services at twentytwenty Insurance Services Inc. in Lakewood, Calif., said he is seeing interest in self-funding among employers with as few as 100 employees.

“Employers have grown really exhausted by the annual increases they've been experiencing (for fully insured health benefits). They're at the point of maybe taking on more risk by self-funding. When I talk to them about it, I compare it to buying a home rather than renting. The return is greater transparency. Self-funding gives employers a chance to look at a unit of health care and figure out how they're going to pay for it. They're in the driver's seat,” Mr. Reid said.

The availability of stop-loss coverage to shield employers from potentially devastating claims makes the switch to self-funding more palatable for even the most risk-averse small and midsize employers, according to self-funding experts.

“Though risk tolerance levels vary, most employers that are self-insured, until they get large enough to absorb random large claims, typically buy stop-loss,” said Philip Curran, managing director of Craford Benefit Consultants in Charlotte, N.C.

In today's stop-loss market, employers can find coverage with attachment points as low as $10,000, said Dennis Donahue, managing director of Wells Fargo Insurance Services USA Inc. in Chicago. The industry rule of thumb is to buy specific stop-loss coverage that kicks in at approximately 10% of an employer's annual health care expenditures, he said.

Even though the elimination of annual and lifetime coverage limits under PPACA has increased stop-loss premiums by about 1% to 2%, the cost of such a backstop is relatively affordable, self-funding experts report.

“Health reform is affecting pricing, but not as much as many think,” said Diane Wells, vp of stop-loss at OptumHealth Financial Services in Golden Valley, Minn., a subsidiary of UnitedHealth Group Inc. OptumHealth provides stop-loss coverage with attachment points as low as $20,000 to the self-funded employer market.

Historically, one obstacle that small and midsize employers have faced in obtaining medical stop-loss coverage is providing insurers with sufficient prior claims experience, something their fully insured carriers have been reluctant to share.

“Very few carriers will let loose of that information,” said Philip Kurtz, president of Benefit Informatics Inc. in Tulsa, Okla.

Fortunately, the availability of health risk assessments and biometric screenings are enabling small and midsize employers to secure stop-loss coverage much more easily, according to self-funding experts.

In fact, some stop-loss insurers are insisting that employers require plan members to complete such medical questionnaires prior to locking in the final premium rates.

“Sometimes, individual health profiles are necessary to give stop-loss carriers sufficient data” to underwrite an employer's program, said Karen Vines, vp in charge of the Wichita, Kan.-based benefits operation of broker IMA Financial Group Inc.

“You can see the logic here. If you have a workforce that is at risk for any chronic conditions, (health risk assessments) and biometric screenings provide valuable insight,” said George Pantos, executive director of the Healthcare Performance Management Institute in Bethesda, Md.