DJ IN THE PIPELINE: Self-Insurance May Be Winning Small Businesses

Virginia general contractor L.F. Jennings Inc. faced another steep increase in health insurance premiums this year with little data that might help it control costs. So the firm decided to change carriers and self-insure its work force of 400, paying a fixed fee and anticipated medical expenses to Cigna Corp. (CI), which administers the plan rather than assuming the full insurance risk.

"Obviously the growing cost of health care in general was motivating us to look at alternative methods of providing the best possible benefits to our employees," said Michael Killelea, vice president of business development at L.F. Jennings. Premiums were set to rise 18% and there was little transparency on the old plan's true costs, he said. "We wanted to have more visibility so we would understand how our health insurance dollars were being spent."

A subtle shift may be under way in the type of health coverage that some small-to-midsize businesses purchase for their employees, as employers with fewer than 500 workers are showing more interest in self-insuring their work forces--an option generally used by large employers--according to industry experts.

Rather than paying premiums to an insurer that assumes the full risk for the group's health-care costs in what are known as "risk" or "fully insured" plans, self-insuring employers assume much of the risk for employee medical expenses themselves, paying carriers a fee to administer a self-funded plan.

While employees may not notice the difference, some employers see self-funding as a way to control their health-benefit costs.

Mark Farrah Associates, a data aggregator for the health-care industry, said late last year that small-to-midsize employers are driving growth in self-insured health plan enrollment. Over the previous five years, membership in self-funded insurance plans grew 11% while enrollment in commercial risk plans fell 13%, the firm said, noting that self-funded membership had surpassed fully insured.

Cigna stands to gain the most from any meaningful move in the area at this point as the company leads major carriers in offering smaller employers self-funded, or "administrative services only," health plans, Goldman Sachs analyst Matthew Borsch said.

WellPoint Inc. (WLP), UnitedHealth Group Inc. (UNH), Aetna Inc. (AET) and Humana Inc. (HUM) also compete in the small-to-middle-market segment, he said.

"I would say that there are employers that maybe previously wouldn't have been interested in self-funding," given their size and the cost fluctuations, that now are more interested, said Steven Lewis, who leads the human capital practice at employee benefits broker and consultant Willis North America, a unit of Willis Group Holdings (WSH), on a recent Goldman Sachs investor call.

Employers on the lower end of the "middle market"--those with fewer than 300 workers--have seen significant increases in premiums the past couple of years and are frustrated because they don't have the same access to their work forces' claims data that large employers do, he said. "Self-insurance is a way to get control of your data and information."

While self-insurance also may mean more short-term increases in costs, there are products on the market that give smaller employers an opportunity to self-insure "without all the volatility that maybe previously they would have experienced," Lewis said. These products allow the small employers, which have less predictable costs than big businesses, to experience more level funding each month, he said in an interview.

Kurt Weimer, president of Cigna Select, the insurer's segment serving employers with 50 to 250 workers, estimated that some 85% of smaller businesses use fully insured plans and 15% self-fund. He predicted that division will shift to 70% and 30% or 65% and 35% in the next three to five years.

"It's not something that's going to happen tomorrow," Weimer said in an interview.

Cigna became the market leader for self-funding smaller employers in 2008 when it acquired Great-West Healthcare, which focused on that area, according to Debra A. Donahue, vice president for market analytics and online products at Mark Farrah Associates. Donahue said she knows of no other major players that have specifically targeted the 50-to 250-employee segment with ASO offerings as Cigna has.

UnitedHealth, though, has seen increasing interest in self-funded plans from employers with work forces between 100 and 300 employees, according to company spokesman Tyler Mason.

WellPoint offers ASO products for groups smaller than 300 in most of its markets and is piloting products for businesses with fewer than 100 employees in a couple of markets, said spokeswoman Kristin Binns. The company hopes to offer the products more broadly later this year.

If a measurable shift has started, it wasn't evident in a 2010 national survey of employer-sponsored preferred-provider organization health plans from Mercer LLC consultants, part of Marsh & McLennan Cos. (MMC). Mercer's data showed that 4% of employers with 10 to 49 employees self-insured in both 2005 and 2010. Among those with 50 to 199 employees, 26% self-insured in 2005 and 24% in 2010, while 38% of those with 200 to 499 employees self-insured in both years.

A 2010 benefits survey by Aon Corp.'s (AON) Aon Hewitt consulting business, however, found that 7% of businesses with 500 or fewer employees planned to switch from being insured to self-insured in 2011 or beyond. Another 29% already were self-insured and 64% weren't planning to convert to self-insurance.

Statistics for smaller-employer ASO market share are difficult to gather, Goldman Sachs' Borsch said.

"We think complaints from some competitors that (Cigna) is aggressively pricing may be partly explained by the disruption wrought by this product shift," the analyst said recently. He declined to specify which competitors had complained about Cigna.

Switching to self-insurance doesn't necessarily mean employers will spend less on health care, although they can know more about where their dollars are going and identify ways to reduce costs, Cigna's Weimer said. It is hard to compare employers' costs in fully insured versus self-insured plans, as self-insuring businesses can design their own plans, and pay only as claims materialize, he said.

Small businesses can limit their risk in such plans by purchasing stop-loss coverage and selecting other tools that cap their financial obligations if claims exceed certain levels.

(Dinah Wisenberg Brin covers the health-care industry for Dow Jones Newswires. She can be reached at 215-656-8285 or by email at dinah.brin@dowjones.com.)