When you’re a business owner, and your costs are going up, you look for options.
Many employers, particularly small ones, are staring down double-digit increases in the premiums they pay for their employees’ health insurance. In Maryland, some small businesses could see their rates go up by 19 percent next year, according to filings released Friday by the Maryland Insurance Administration.
Other business owners have reported spikes as high as 30 percent in one year, which they attributed to new requirements of the Affordable Care Act. A federal report released earlier this year also acknowledged that most small businesses and individuals will end up with higher premiums, as opposed to lower ones, due to the ACA’s rules.
Meanwhile, actual health care costs continue to rise — albeit more slowly than in years past — which means large employers also worry about higher insurance bills.
But there are ways to fight back against those cost increases, experts say, though some of the strategies aren’t for the faint of heart. They can be tough to pull off, particularly for small employers.
One option for small-business owners is to take the leap into self-insurance — meaning the employer pays employees’ medical claims out-of-pocket. Employees don’t notice the difference: The employer still takes money out of their paychecks. But the employer can save money while having more control over medical services that are covered.
Most large companies are self-insured, but small businesses have traditionally shied away from the practice because it’s riskier than joining a traditional plan. But several brokers said more of their small-business clients are asking about self-insurance, and other experts said they expect the strategy will become more common among small groups.
The advantages are tempting, experts said, but the risk is substantial.
“Let’s say a small business has 20 workers and it costs on average $5,000 per worker to provide insurance — so $100,000 a year,” said Paul Fronstin, a senior economist at the Employee Benefit Research Institute. “If you become self-insured, and you get one large claim, you might be on the hook for way more than you had budgeted. But we know if the cost of health coverage continues to go up, employers are going to look for ways to manage that increase. And self-insurance, despite the risks, may become more attractive.”
Additionally, self-insured employers are not subject to as many new government regulations, according to Alfred W. “Al” Redmer, president of Redmer Insurance Group LLC, a brokerage in Baltimore County serving small and mid-sized businesses.
“So because of that, [your insurance costs] can be more reflective of your group of employees, as opposed to your rates being based on the larger market,” Redmer said. “So there are certainly advantages of being self-funded. And as the uncertainty with this new small-business insurance environment created by the ACA continues, I think we’re going to continue seeing more interest in self-funding.”
New strategy on the block
Another cost-containment tactic — known as “reference pricing” — is relatively new. With reference pricing, an employer puts a cap on the amount it will pay for certain expensive procedures that are offered by many providers at a wide range of prices.
For example, if the “reference price” for a knee replacement is set at $30,000 but an employee chooses a provider who charges $40,000, the employee is responsible for paying $10,000 out of pocket.
For procedures performed at or below the reference price, the employer will either pick up the entire tab or the employee will chip in according to the plan’s cost-sharing terms.
The goals of reference pricing are to reduce costs to employers, bring down the overall cost of health care and encourage employees to become more engaged in paying for their care.
Very few employers are currently using reference pricing, but the strategy could become more popular as large businesses search for ways to cut costs, Fronstin said.
Several health insurance brokers and other industry players said they’d never heard of reference pricing, but that the tactic could be appealing — if it works.
“At the end of the day, if it’s legal, if the carriers are making it available and if it’s going to save employers money, businesses are going to look at it,” Redmer said.
But again, reference pricing might not make sense for small employers, Fronstin said. It works best for large, self-insured employers who pay medical claims out-of-pocket. For small employers, it might be cheaper to continue paying premiums as usual.
But if reference pricing becomes more popular, that could be one more incentive for small businesses to choose the self-insurance route.