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Self-insurance can save on health-care costs--and it's probably less risky than you think

Sick with worry about health-insurance costs? You might find a remedy in self-insurance, in which your company, rather than an insurer, pays medical claims directly. Too risky? Not necessarily. You can limit your liability with a low-cost policy that covers only catastrophic illness.

This option, once nearly unthinkable for small employers, is gaining popularity as double-digit premium hikes return for fully insured plans. "Self-insurance for companies with 25 to 50 employees is the fastest-growing segment of my business, up about 30% over the past 18 months," says Curtis R. Donley, a benefits consultant in Indianapolis. For large employers, it's nothing new. In 1997, 60% of companies with more than 500 employees self-insured, compared with just 3% of those with fewer than 50, according to a recent study in the policy journal Health Affairs. A key attraction: control over expenditures. Since these plans are governed by looser federal law, state mandates for specific benefits don't apply. Employers can tailor a plan to their workforce--excluding childbirth, say, for an all-male group. They are also exempt from the 2% to 3% state tax on premiums. Improved cash flow is another advantage. You pay after expenses are incurred rather than prepaying with premiums. Fixed costs can be cut 35% to 65% and total payout by about 15%.

To self-insure as a small employer, you'll need two partners: a third-party administrator (TPA) and a stop-loss insurer. The TPA will find your company a health-care network--usually, a preferred provider organization (PPO)--and process claims. The stop-loss insurer will recommend how much to put aside each month, and its coverage kicks in only if claims exceed the stop-loss limit that you've chosen.

To set up a self-funded plan, first find a TPA familiar with small businesses. Brokers aren't likely to help--buying just stop-loss slices commissions by as much as 50%--so get a list from the nonprofit Self-Insurance Institute of America, Inc. (800 851-7789). Most TPAs will help you select a stop-loss insurer.

Even the smallest company can self-insure, but without consistent cash flow, "one sick employee can throw your balance sheet out of whack," warns Larry Levitt of health-policy think tank Henry J. Kaiser Family Foundation. And don't consider it if the majority of your workers aren't in relatively good health. Too many small claims could be catastrophic--for you, anyway. For details on setting up a self-insured plan, click Online Extras at frontier.businessweek.comBy Joshua Kendall


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