Nonprofits

Commentary: With rising premiums on the horizon, should nonprofits go self-insured?

Some organizations are paying for individual employee health claims out of pocket instead of through a monthly, fixed premium to a health insurance carrier.

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The recent inflationary period in the U.S. economy has proven increasingly difficult for clinicians and healthcare systems. Rising drug prices, prolonged labor shortages, supply chain challenges, and pent-up demand due to patients delaying care during the pandemic have contributed to higher health care costs and pressured hospitals to raise rates. 

Health insurance premiums have skyrocketed, with premium inflation soaring 28.2% in the past 12 months. As supply chains often delay inflation’s effects on health provider balance sheets by a year or two, many economists believe that upswings in medical costs could extend beyond the present-day inflation wave.

With additional premium increases on the horizon, nonprofit organizations face the daunting prospect of providing health care to employees while maintaining financial stability. To resolve this dilemma, growing numbers of nonprofits are turning to self-insurance, paying for individual employee health claims out of pocket instead of through a monthly, fixed premium to a health insurance carrier.

Self-insurance can lead to a greater assumption of risk for employers. But adopting a self-insurance model allows nonprofits to eliminate monthly premiums, reduce unnecessary costs, and create a tailored health care plan that considers the specific needs of their employees, resulting in improved savings over the long run. 

The benefits of self-Insurance

Over the past several years, increasing employer groups have recognized that health insurance premiums are rising at unmanageable rates. The average premium for family coverage has jumped 20% over the last five years and 43% over the last 10 years. 

Ultimately, the costs of soaring insurance premiums must be passed off to employers or the individuals covered under the plan. For an employer, these expenses reduce funds that could be used to achieve its organizational mission. And higher insurance fees are financially untenable for non-profit plan members who are already paid less than their for-profit counterparts.

To free themselves from this upward trend of constantly rising premiums, nonprofits have sought self-insurance to keep employees protected while removing the cost of an unsustainable monthly fee. Unlike the traditional HMO model, which includes a standard benefits package with a monthly rate paid to an insurance company, nonprofits that self-insure set aside a specific monthly amount to pay for employees’ expected doctor and hospital bills. 

By eliminating the regulations associated with traditional insurance plans, non-profits are empowered to choose benefits that fit their organization and limit expenses to their own employees' direct health care costs. This strategy often leads to unused funds at the end of the year that can be reallocated to other business initiatives. 

While cost savings from these tailored selections may not be immediately evident, nonprofits that understand their workers’ requirements, learn from past medical expenditures and choose benefits that ensure optimal health can keep costs from fluctuating and recognize significant savings over a five-to-10-year span.

A robust benefits package can also be an effective tool in attracting and retaining talent. In a sector where workers often expect generous medical coverage to make up for low salaries, a low-cost, benefits-rich health plan can determine a prospective employee's determining factor when deciding between various nonprofits. 

Self-insurance strategies

Nonprofits choosing a self-insurance model have room to be creative in reducing health care costs. To start, administrators can survey employees to find areas they need to focus on when creating a plan. 

While most self-insurance plans offer basic medical coverage, organizations can customize add-on benefits such as pharmacy, dental, vision, and other ancillary services. Nonprofits that self-insure have the option to manage their plan design or contract with an insurance company to help select the right coverage, process claims, manage payments, or provide administrative services.

The flexibility and independence to select custom health services can help nonprofits incorporate medical coverage uniquely suited to treat employee conditions. For example, an organization that knows many of its staff have diabetes can opt for benefits that home in on diabetes prevention, nutrition, and treatment.

Identifying drivers of well-being and developing innovative programs for preventative care is also essential for maintaining employee health. No employer can guarantee low medical claims, but incorporating wellness initiatives that increase staff productivity, health, and morale can reduce future costs. 

Additionally, nonprofits should bear in mind that health care isn’t just medical but also involves holistic care. Incorporating the social determinants of health, environmental conditions that affect quality-of-life outcomes and risks,  can reduce employee stressors and contribute to a healthier organization.

As a stable work-life balance is one of the key social determinants of health, nonprofits that self-insure can adjust their office culture to reduce future treatment costs. Counseling services, paid maternity and paternity leave, a flexible work schedule, and positive leaders that encourage the use of vacation can all contribute to a healthy employee base.

Employees participating in a self-insurance plan can rest assured that their employer has their best interests at heart and that their organization is financially incentivized to create a plan that keeps them healthy.

Drawbacks and Solutions

Despite the perks of stepping outside the traditional HMO model, self-insurance can place nonprofits at risk should a catastrophic event arise. If an unexpectedly large number of employees get seriously ill, their treatment costs could drain the entire medical fund or require expenses beyond an employer’s ability to pay.

To counteract this threat, nonprofits should partner with a knowledgeable broker to incorporate a stop-loss component into their self-insurance plan. Stop-loss insurance covers employees’ medical bills after their parent company has paid a predetermined amount, ensuring that an organization isn’t left paying for treatments outside their means.

Nonprofits that operate under a self-insurance plan should also be aware that certain employee treatments may fall outside the confines of their benefits. Under the Affordable Care Act (ACA), insurance plans offer a standardized benefit package that covers a wide range of treatments.

While the ACA model may be more comprehensive, companies are often left footing the bill for coverage that doesn’t apply to those who work for them. PMPM payments (per member, per month), a feature of the ACA where a company pays a fixed amount to a primary care physician based on the number of employees on the physician's panel, can be expensive.

PMPM payments must be made monthly regardless of whether the physician meets with the patient, leaving nonprofits stuck with unnecessary payments. As a result, nonprofits that select an ACA insurance model should understand that while their plan may provide more benefits, it will not consider the intricacies of the employee population, creating excess fees.

In this environment of surging premiums, unions, trade organizations, and other nonprofits seek alternative solutions for affordable employee health care. The increasing adoption of the self-insurance model signals an evolution in consumerism that allows nonprofits to be agile and independent in a rapidly shifting economy. Through a self-insurance plan, nonprofits can put employees first and maintain financial stability in a challenging operating environment.

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