Steve Donahue, an economist with the federal Pension and Welfare Benefits Administration, estimates that four or five of every 10 American companies that offer health coverage self-fund. It’s a trend that Foster Higgins, a national consulting firm, has seen through its annual employer surveys.

“There has been a huge growth in the self-insured plans,” says managing consultant Roel Hoekstra. “Our experience is that almost everybody who has more than 100 employees has gone to self-insurance or taken a hard look at it.” Most large and midsize employers fund their own health plans. But the Society of Professional Benefit Administrators, which uses a broader definition of self-funded plans, notes that a surprising 65 percent of employers with fewer than 100 employees are self-funding.

There are no Virginia-specific figures on health insurance self-funding, but there is anecdotal evidence, and most of it shows the state’s smaller businesses following the national trend.

The promise of saving health-benefit dollars is driving the charge, but the experts warn businesses to look before they leap. Steve Sowers is vice president of the employee benefits division of Hilb, Rogal, and Hamilton Co., a national insurance agency based in Richmond.

“There can be cost advantages to being self-insured,” Sowers says, “but you have to temper that statement. If you have higher-than- expected claims, it can be more expensive than traditional health insurance.”

At the Richmond office of William M. Mercer Inc., senior health and welfare consultant Marc Vallario also recommends caution. “What I say to employers when they are thinking through this is: How much risk are you willing to take, or what kind of risk can you take?” Still, more than 100 Mercer clients have decided the risks are acceptable. “What we have seen is the smaller employers – 500 and less – they are now looking into self-funded health insurance.”

Advocates of self-funding say it has many advantages: cost savings from 5 percent up to 50 percent over conventional plans, depending on whose numbers you’re using; exemption from some state regulations, benefits mandates and premium taxes; uniformity of plans for companies with operations in different states; benefits tailored to the work force; and costs determined by the company’s claims experience alone, instead of premiums based on other people’s problems.

Some large firms simply pay all employee health-care claims out of pocket, but most self-insurers budget costs based on past claims and buy indemnity insurance to limit exposure above that amount. These indemnity policies, called stop-loss or reinsurance, protect against higher-than-predicted individual claims and catastrophic group expenses.

“It is always a trade-off,” Vallario says. “The lower the stop-loss threshold, the higher the premium. The smaller the employer, the lower the specific stop-loss threshold should be. If you are a 10-person employer and you don’t have a lot of cash in the bank, buy the lowest specific stop-loss you possibly can.”

“As far as the employees are concerned, it looks and smells like traditional health insurance,” says Tom Ford, president of Group Benefits Unlimited in Richmond. But “when an employer is in charge of spending its own health-insurance money, it tends to be better about husbanding it.”

The employers, however, don’t save the entire difference between the traditional health-insurance premiums and the benefits actually used. They must also factor in the costs of consulting, third-party administration and stop-loss coverage. But if there is money leftover at the end of the year, it goes back to employers – not to some health insurance company.

A traditional insurance plan must, under Virginia law, offer certain benefits – autologous bone marrow transplants, for example. Virginia also mandates coverage for services by podiatrists, chiropractors and nine other such specialists. Self-insurers have more freedom to pick and choose.

The self-insured employer is free to start or stop a plan at liberty, and its plan is exempt from direct state regulation. States can’t impose a premium tax like Virginia’s 2.5 percent levy on conventional health insurance. Congress pre-empted state control of self-funders with the Employment Retirement Income Security Act of 1974, which was designed to promote interstate uniformity and to increase coverage options in localities where conventional insurance is costly.

ERISA imposes a fiduciary duty on self-funders, but it requires little else except reporting. Plans must be portable, offer 48-hour maternity hospital stays and keep employee contributions in a trust fund. But Donahue says there is, essentially, no other regulation.

“You the employer have complete discretion,” says Mike Ferguson of the Self-Insurance Institute of America in Santa Barbara, Calif. “You decide what is going to be covered.”

Self-funding does have its critics, however. The National Association of Insurance Commissioners says freedom from regulation invites stinting on benefits, and it has horror stories to tell. But Dave Morgan, a principal in the Richmond benefits consulting firm Slabaugh Morgan White and Associates, counters that most self-funded plans offer the same coverage as traditional plans. “If anything, we find that employers in self-funded plans want more and better benefits than are available in fully insured plans, particularly in the wellness area,” agrees Arnold Masinter, president of Benefit Plan Administration in Roanoke.

Regulation or no regulation, self-funding means assuming a bigger role in employee health management and taking over the paperwork and other services an insurance company normally provides. That’s where third-party administrators can help.

Bob Jones is president of National Benefit Plans, a Norfolk third-party administrator working for 45 firms with employees in 30 states. Among them are Boar’s Head employees in Virginia, New York and Arkansas. “Virginia was one of the toughest states to crack,” he says. “It is very conservative, and it doesn’t like change, but we’ve been growing very rapidly here lately. We’ve doubled in size in the past 18 months.” Boar’s Head hired Jones’ firm to negotiate with providers, oversee the plan, process the claims, and so on. “That’s because they are the experts,” says Brier, the controller for Boar’s Head. “That’s their field. We make baloney, and we make the best baloney in the world, but we aren’t experts at health insurance.”

Third-party administrators can handle the full spectrum of insurance setups, including fee-for-service plans, preferred-provider organizations, point-of-service plans, even health-maintenance organizations. “We do everything ... except for one thing – we don’t assume any risk,” Masinter says.

One of the most important functions of a third-party administrator is collecting and processing large amounts of data. First Health Strategies, a subsidiary of First Data Co., serves about 2,890 self-funded health insurance clients – almost twice the 1,581 handled by America’s next largest third-party administrator, according to the company. The Salt Lake City-based company has sales and administrative offices nationwide.

“Much of the success of First Health is a result of our strong technological foundation,” says Jerry Quinn Sr., a senior vice president in the company’s Baltimore office. “In today’s marketplace, any plan administrator needs to bring some pretty advanced technology to the table,” says Barbara Antinori, a vice president in First Health’s Richmond office.

Top-flight data processing is essential to customer service, notes Bill Hendren, president of National Claims Administrative Services, which helps employers manage and run self-insurance programs. “What you must not have in this business is a backlog,” he says. Hendren’s firm, like Masinter’s, is proof that computing power and sophisticated software are integral to third-party services.

In addition to crunching numbers and processing claims, third-party administrators can add value to self-funded plans by shopping around for specific categories of coverage called “carve-outs.” A good example of a carve-out provider is Caremark Pharmaceutical Services. A wholly owned subsidiary of Medpartners Inc. in Birmingham, Ala., the company describes itself as the largest independent pharmacy-benefit manager in the United States.

“We provide the prescription piece of the benefits program,” says area Vice President Jon Couch. Caremark’s arrangements with major drugstore chains give employees of a self-insured company prescription coverage at 53,000 locations. In addition, Caremark operates four mail-order prescription houses, including one in Richmond that handled 1.5 million orders last year. Most clients, Couch says, contract with Caremark on a fee-for-service basis. Caremark works with each employer to design a plan, keep track of employee eligibility, make billing arrangements and create communications materials that detail benefits and list preferred prescription drugs – usually generic.

Other common carve-out providers specialize in things like substance-abuse treatment, mental-health care, dental services and vision care.

Boar’s Head looked at four administrators before settling on National Benefit Plans – a firm that a supplier had recommended. Often, however, a company that wants to self-insure brings in a consultant to help select a third-party administrator.

“Our job is to consult with the client and then ultimately place the coverage,” Sowers says. “This is truly an educational process if you are dealing with an employer that is not familiar with the self-funding process.” Sowers starts by quizzing the client on operational issues, risk tolerance, claims experience and the number of employees that will be covered.

“Self-funding works for small employers as well as it works for large employers,” notes Frederick D. Hunt Jr., president of the Society of Professional Benefit Administrators. But there is no consensus on how small is too small. Bob Kristofak, a Richmond sales and account management vice president for Atlantic Trigon Administrators, says 200 employees is a common threshold. Brier says the Boar’s Head pool – fewer than 100 people when the firm switched four years ago – is now about 150.

“Seventy-five employees is certainly large enough to consider self-funding, but they need to be cautioned that their claims can vary significantly from year to year,” Morgan says. Hendren has 168 groups below 50. Jones handles a group of 18, while one of Ford’s stop-loss carriers goes down to five employees.

The smaller the group, the harder it becomes to forecast claims and spread risk. “But there is nothing to say that a very small group can’t have a self-funded plan,” Sowers says. “You really have to do a needs analysis with every client.” You have to investigate all the alternatives. Hendren agrees, “You have to have the right plan for you, and you have to have the right kind of stop-loss [insurance].”

The best way to begin is to gather claims data for the past three years and take it to a consultant. “We can do it from the strategy to the benefit design to bidding and finding the vendor,” says Vallario at William M. Mercer. “It depends on how much help you want. We can do all of it, or we can do some of it with you.”

“What we offer employers is an objective, experienced view of the market,” Morgan says. Sometimes the best advice is to stay with traditional coverage. “Self-funding is not for everyone,” Hendren agrees. Discount provider networks that can make a big difference to self-funders may not be available in rural areas, and in urban areas fierce HMO competition is keeping premiums in check.

Morgan says some large self-insurers are even re-evaluating their self-funded plans. “The truth is there is movement both ways,” he says. Even with a third-party administrator, self-funding can add to an employer’s administrative burdens. Apart from resources, the company must have a commitment to containing health costs and to monitoring how money is being spent.

Boar’s Head seems to fall in that category. Entering its fifth self-insured year, Boar’s Head has had enough experience with its plan to make informed assessments, and Brier is enthusiastic. “It made all our people happy, and that’s a very important thing,” he says. “We’re a family owned business and we treat our people like family, too. ... And it saved us money.”