Midsize employers stung repeatedly by sizable increases in their insured health programs should be asking their brokers why they haven't suggested self-funding.

Large employers have self-insured their health benefits for nearly 40 years, made possible by the passage of the Employee Retirement Income Security Act of 1974. ERISA has enabled self-funded employer plans to keep the rate of increase below that of insured plans by enabling those employers to tailor their benefits and strategically direct wellness and disease management efforts.

Benefit costs for self-funded employers have grown 26% over the past five years compared with 35% for those that buy health insurance, according to the Kaiser Family Foundation. But only 25.7% of employers with 100 to 499 employees self-insure, compared with 82.1% of employers with 500 or more employees, according to the U.S. Department of Health and Human Services. Just 13% of employers with fewer than 100 employees self-fund benefits, HHS reports.

By self-insuring, small and midsize companies could get a better handle on health care costs because they would have access to aggregated claims data—something insurers rarely share with insured employers.

They also would be protected by ERISA, which shields benefit plans from onerous state benefit mandates requiring that health plans cover an array of medical services. Moreover, their health plans no longer would be subject to state premium taxes, which will increase under federal health care reform.

By self-insuring, small and midsize companies would pay a nominal fee to insurers to handle claims instead of health insurance premiums. And to guard against potentially devastating catastrophic claims, small and midsize employers that self-insure could buy medical stop-loss coverage, a form of excess insurance that pays claims that exceed a certain threshold.

Maybe some brokers aren't telling their small and midmarket employer clients about self-insurance because it would significantly reduce their compensation, which is based on a percentage of premiums. Moreover, insurers have been paying bonuses on top of commissions to brokers that bring them large volumes of business. So how likely is it that brokers will recommend that some accounts, especially those that have been the most lucrative, self-insure?

Brokers and consultants historically have maintained that self-insurance isn't an option for small and midsize companies because they do not have enough employees to provide a “credible” sample that actuaries can use to make accurate projections of health care costs. But with the use of predictive modeling and the availability of stop-loss coverage, it now is feasible to self-insure groups with a few as 50 employees.

Fortunately, as insurers reduce commissions to meet new minimum medical loss ratio requirements in the federal health care reform law, brokers' compensation is becoming more transparent, and many have begun recommending self-funding to their small and mid-market clients as a way to keep their business.

To run a successful operation, small and midsize employers need full control over all aspects of their business. Self-insuring health benefits will put them in the driver's seat.