Some employers that offer health care, workers compensation or disability coverage to their workers decide not to purchase that coverage from traditional insurance companies. Instead, the employer chooses to set aside money in a trust fund and pay all claims itself from that fund, thereby "self-insuring."
Why Self-Insure?
Self-insured coverage often is cheaper for employers because they don't need to follow rules set by each individual state. Health insurance, workers compensation and disability coverage are governed by the states, and some states have more stringent rules than others about what must be covered, which affects the cost of a policy.
High-Cost Mandates
Experts cite health costs in high-cost states like Massachusetts when explaining why an employer would chose to self-insure. In 2008, a family health insurance policy in Massachusetts cost an average of $13,788, the highest in the country, according to the research group Kaiser Family Foundation. That state requires that state-regulated health policies cover expensive services, including infertility treatments, and these mandates accounted for 12 cents of every dollar spent on health insurance in the state, according to a study by the state Division of Health Care Finance and Policy. Self-insured companies in Massachusetts are not subject to most of those mandates.
Federal Regulation
Self-insured health insurance, workers compensation and disability coverage plans are governed by a different set of regulations created by the Employee Retirement Income Security Act (ERISA), a federal law approved in 1974. According to the U.S. Department of Labor, ERISA sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.
Tailor-Made Coverage
ERISA allows self-funded plans to design their coverage for the needs of a specific workforce, making the greatest use of limited health dollars while avoiding state-mandated benefits they may consider unnecessary, according to Society of Professional Benefit Administrators President Frederick D. Hunt, Jr. "For instance, one plan of food workers includes lead testing for cannery workers and testing for exposure to pesticides for the farm workers (required of the workers by other government agencies) in the plan's benefits," Hunt says. "Those, of course, would not be in some government 'standard' set of benefits."
Considerations
Employees who receive health insurance, workers compensation or disability coverage from a self-insured plan may not be able to tell the difference, mainly because many self-insured employers hire an insurance company to handle the day-to-day tasks of managing the plan. Employers often can save money by opting to self-insure. However, they also run the risk that the health, workers compensation or disability claims incurred by their workers might be higher than expected. In this case, they must absorb extra cost themselves. That's why many smaller companies choose to stick with traditional coverage rather than self-insuring.
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