Rising health-insurance costs got you down? Self-insurance, an alternative way to finance health benefits, might provide some relief. Under a self-insured plan, as opposed to a fully insured plan, your company, rather than the insurer, pays medical claims directly. Though self-insurance isn't feasible for all small employers -- financial stability is a sine qua non -- it is receiving some rave reviews. "It has saved us about 40% per year in health-care costs. The added flexibility has been valuable, too," says Tom Ancona, Jr., president of ProLam Products, Inc., an Evansville, Indiana-based manufacturing company with 35 employees. Ancona has taken advantage of the freedom from state insurance regulations to tailor the plan to his young workforce. For example, Ancona has set the co-pay for all doctor visits at $10, making it possible for all employees to afford regular care for their children.

GETTING STARTED. To set up a self-funded plan, small employers need to work with two partners: a Third Party Administrator (TPA) and a stop-loss carrier. The TPA handles the paperwork and finances. Based on your expected claims, the stop-loss insurer will recommend how much to put aside each month to cover the claims that you'll pay. If the claims go above a predetermined limit that you've chosen for both the company as a whole and any individual employee, the stop-loss insurance coverage kicks in. For a 50-person firm, stop-loss limit would typically be set at $10,000-$15,000 for each employee. For the whole firm it might range between $65,000 and $200,000 depending on claims history, demographics and plan design.

Since your broker probably won't know much about self-funding, your best bet is to contact a TPA directly. Most TPAs will, in turn, help you choose a stop-loss carrier, giving you price quotes for at least a couple. The Self-Insurance Institute of America (800-851-7789; www.siia.org) provides a list of TPAs free-of-charge. You might also try looking in your local Yellow Pages under "employee-benefit administrators."

Since self-funding can be complicated, you'll need to find a TPA you can trust. Don't settle on the first one you contact; it's worth investing the time to shop around. You might ask for references such as the names of current (and former) clients about the same size as your firm. "Selecting a TPA is an intimate business decision, like hiring a lawyer or CPA. Chemistry counts," advises Fredrick D. Hunt Jr., president of the Society of Professional Benefit Administrators, a non-profit trade association based in Chevy Chase, Maryland, that's composed of more than 400 leading TPAs.

MAKING THE RIGHT CHOICE. A TPA's main function involves processing claims after first checking both the employee's eligibility and the medical appropriateness of the care received. Thus, they should also be able to respond sensitively to your employees' concerns. "A good TPA becomes an extension of your HR staff," says James A. Kinder, president of the Self-Insurance Institute of America. TPAs are also responsible for hooking up your firm both with a preferred-provider organization (PPO) network and a utilization review service, which monitors those expensive hospital stays. Though the monthly administrative fee charged by TPAs ranges from about $12 to $18 per employee, price isn't everything. Those on the high end of the scale may be more technologically sophisticated, relying more on electronics than on paper to process data. In the final analysis, however, quality of service is key. Ask about the claims backlog -- when they languish over 20 days on average, that's a sign of trouble. (Some TPAs won't even be able to provide this information because they don't log in claims promptly). In addition, make sure that their own insurance coverage is adequate -- say, in the million-dollar range -- because a major error can be very costly.

Furthermore, look for a TPA that offers you as many choices as possible when it comes to banking arrangements. Typically, you'll have two accounts: a savings account and a zero-balance checking account. You'll deposit a set amount every month into the savings account and claims will be paid from the checking account. Some small employers prefer setting up a 501 c (9) trust account, which protects both the reserves and all accrued interest from the paws of the IRS. This savings vehicle, however, has the drawback that excess funds must all be earmarked for health-care expenses.

In most parts of the country, TPAs are required to apply for a license from the state insurance department. However, licensing by itself doesn't guarantee anything. "A TPA without a license is not necessarily a bad TPA, " says Karen Barber, senior vice president of Robey-Barber Insurance Services Corporation, a Tampa, Florida-based TPA (800-749-7409; www.rbis.com) that serves small employers in over 30 states. A TPA doesn't need a license in a particular state if it does less than 5% of its business there. If a TPA handles only self-insured plans, it's regulated by the Department of Labor. To be safe, you might check with the appropriate regulatory agency to see if any complaints have been filed against a given TPA.

ONE STOP SHOP. A simpler way to self-insure is to sign up with a "one-stop shop" that houses both a TPA and stop-loss insurer under one roof. The two major national players are Great-West Life and Annuity Insurance Company, based in Denver, Colorado (800-537-2033; www.gwla.com) and licensed in every state but New York; and American Medical Security, Inc. of Green Bay, Wisconsin (800-232-5432; www.amschoices.com), which serves small employers in about 35 states. They both require that you use an agent, but they'll track one down near you. You'll lose some choice -- you'll no longer be able to handpick your stop-loss insurer, for example. No matter which route you take, self-insurance may still offer a Prozac-free antidote for your health-care blues.

By Joshua Kendall in Baltimore

To: STAFF & BENEFITS