Self-Insurance

Group Health Insurance

Employers of large groups with 1000 or more beneficiaries down to companies with as few as 50 employees purchase almost all nongovernmental group health insurance. Like other large employers, government agencies purchase services for their employees and also for recipients of entitlement programs. They have all been through the insurance wars of the past 20 years. Employers also have to purchase benefits for retirees, a growing class of recipients.

To control the ever-rising cost of health care and the costs associated with administering these benefits, most purchasers have taken on the risk of some of the activities listed earlier. Each service is available from health plans or specialty vendors individually or as a complete package, for which the purchaser designates a fiduciary, and the risk is born totally by the purchaser. Most self-insured people mitigate the risk by buying reinsurance that covers catastrophic costs above a predefined level. Like other aspects of the health insurance market, reinsurance is becoming more costly too. In general, midsize groups of 100 to 500 recipients move in and out of the self-insurance market as prices fluctuate, whereas larger companies find that assuming the risk themselves is more attractive and tend to continue in the market once they enter.

Two areas of risk appear to be the reasons why employers are attracted to self-insurance. The cost of health care services continues to increase and the trend that slowed during the early to mid 1990s has accelerated to double digits in most of the drivers of health care delivery. The most visible cost component is the trend toward pharmacy benefits, which now generates more health costs in most plans than inpatient hospital care. As the costs of services and the demand for services continue to rise, the margins and taxes passed on to purchasers as part of the cost of health insurance represent potential savings.

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