The upward trajectory is staggering. The cost of health insurance premiums has risen 80 percent in the last 10 years, while employees’ wages have increased 1.8 percent over the same period. (2013 Employer Health Benefits Survey, Kaiser Family Foundation) With health insurance's long history of draining the financial resources of firms, it makes business sense to weigh your healthcare options to see if there are opportunities for savings. The decisions firms make must factor in their size, the economics of making a change, and their overall financial state. With this in mind, here are some considerations.
Companies providing self-insured plans often subscribe to stop loss policies — similar to high-deductible insurance — to protect against catastrophic claims. Usually, there is an annual limit for the stop loss amount for each participant in the plan and an aggregate amount for each policy year. The premium is calculated for each employee for each month and is based on the number of participants, their age and various other factors.
The option to self-insure has many attractive features. Unlike commercial plans which typically offer set packages of benefits, you have more control over plan design and can tailor the plan to suit your particular firm. Another attractive feature is that, since self-insured plans are not commercial products, there is no need to build in extra charges for profits or taxes — which can yield cost savings. There are also cash flow advantages since you will pay for the actual cost of care instead of a fixed monthly premium. Keep in mind that with commercial plans, you pay the same premium even if your employees use less care in a particular month than is normal. With a self-insured plan, you may go for months with lower costs — so you are able to hold on to that extra money and set it aside for periods when costs might be higher.
There are sound business reasons for buying a commercially-insured plan — the certainty of working with an established provider and consistent cash flow for starters. With these plans, the firm pays a set premium each month, no matter how many trips to the doctor, visits to hospitals and emergency rooms and prescriptions the employees take. With a self-insured plan, your costs might be high one month and low the next — playing havoc with cash flow.
You’re better protected with a commercial plan. There will be times when more employees need medical care than expected. Or should an employee become seriously ill, treatment costs could run into the hundreds of thousands, or even millions, of dollars. Your firm may not be able to absorb these costs, which could require borrowing. A commercially insured plan would protect you from that risk.
Cost containment in providing health insurance should be a firm priority given the historical record of unrelenting increases and the ongoing uncertainties of the Affordable Care Act. In concert with a financial advisor and an insurance consultant, weigh the factors that impact your firm and identify the options that work best in your circumstances.
About the Author:
John Fitzgerald, CPA, with Berdon for more than 20 years, is an audit partner and one of the firm's key advisors to law practices. Consulting with practice leaders, he evaluates the financial and economic impact of partnership agreements and reviews candidates for mergers and lateral partner additions. Contact him at firstname.lastname@example.org or on LinkedIn at http.//www.linkedin.com/in/johndfitzgerald.