Self-Insured Health Plans Worth Considering

No contractor should be forced to close its doors due to health insurance issues.

By Mark Lund

For a growing number of employers, health-care costs continue to rise while options for providing coverage dwindle. Nowhere is that truer than in the construction industry, where the cost of health-care plans has grown so high that only about half of companies provide any type of companywide coverage. For those that don’t offer coverage, their ability to compete is diminishing: The best workers increasingly are moving to those companies that do offer some type of health care.

No contractor should be forced to close its doors due to health insurance issues. Today there are many ways that some type of coverage can be provided, including some non-traditional methods. Many state construction industry trade associations now offer plans. They usually are designed for contractors employing two to 50 workers and carry relatively affordable premium charges. Another option is the Health Savings Account. Under this plan, the owner of a contracting firm and its employees can make pre-tax contributions to a health savings account that are used to help pay for medical-care costs under high-deductible plans. For 2008, a high-deductible plan is defined as a plan with a minimum annual deductible of at least $1,100 for self-only coverage, and $2,200 for family coverage. Overall costs are controlled by having employees share in more of the costs.

Mark Lund, CPA, CCIFP, partner-in-charge of construction industry services at the Houston office of Weaver and Tidwell.

Another option is self insurance. As it implies, this type of program allows a contracting company to set its own health-care parameters based on need and affordability. Some contractors are finding that self-insured arrangements can cost up to 25% less than premiums under a conventional indemnity coverage health-care plan.

Self insurance has several different forms. In the past, entities may have formed an "association" for the purpose of designing a self-insured health program. By joining together, companies were able to spread the costs and risks of a plan. However, history shows associations work well only until claim costs rise and stop-loss insurance premiums increase. At this point the companies with lower medical care claims tend to opt out of the association.

In recent years, contractors have been more likely to design their own self-insured health plan, working with an insurance company and third-party plan administrator. In these cases, the contractors believe that its actual claims-paid ratio, versus premiums-paid, will be favorable. Such plans can be designed with the employer paying all of the health-care claims, or with the employee paying a monthly premium as determined by the company with input from the insurance company and administrator. To help manage the risk, the company will usually purchase stop-loss insurance to cover catastrophic claims that could cripple the contractor if they had to pay the entire claim cost. The stop-loss coverage would begin covering the cost of the claim at a predetermined amount – when the cost of the claim reaches $50,000 or $100,000 or more, depending on the risk the contractor is willing to assume.

A self-insured plan is typically administered with a bank account established and funded by the contractor and. If desired, employee contributions in the form of premiums are charged by the contractor. A third-party insurance administrator, which can be an insurance company, receives all the medical claims and reviews charges based on contractual agreements with the providers. The amount needed to pay the claims is drawn from the bank account, usually on a weekly or monthly basis.

Self insurance can be a less expensive way to provide health-care coverage, however, it isn’t for all contractors. In particular it may not work well for small companies that do not have a lot of employees to share the costs and risks. The larger a company is, the less expensive it becomes for each worker. In general, self insurance is recommended for companies that employ at least 200 workers and have relatively low turnover.

It should be noted that self insurance can prove crippling to any contractor if an inordinate number of large claims are filed in a single year. That’s why all companies need to closely analyze the demographics and health-care histories of their employees before self insuring. Similar to safety plans implemented by contractors to reduce worker’s comp claims, wellness plans can be implemented to help minimize the overall cost of the self-insured health plan.

For those considering the possibility of self-insuring, understanding a few key accounting and tax issues is necessary. For financial reporting purposes, the company needs to record an accrual at month and year-end related to that period’s health-care costs. Those costs include reported claims for which the administrator has begun processing for payment, and claims incurred but not reported (IBNR). IBNR claims are estimates of claims incurred during the reporting period but not known or reported until a later period. This can add to the complexity of reporting self-insured activities. Additionally, the tax deductibility of such self-insured claims accrued at year-end but not paid until after year-end should be reviewed with your tax professional.

The choice of the insurance company or third party administrator is critical to any contractor who wants to self insure. Besides the requisite experience needed to advise and administer a self-insured plan, the insurance company or third-party administrator should have an annual audit of its procedures and internal controls. Such reports are typically referred to in auditing literature as Type II SAS 70 reports. These reports provide the company and its employees assurance that claims are being processed and paid in accordance with sound internal controls procedures that are operating effectively.