Employers who wish to offer health benefits generally do so in one of two ways. They can buy a health insurance policy from a health insurer or health plan company, in which case the insurer takes the financial risk for the cost of benefits (leaving aside the complexities of retrospective experience rating) or they can self-fund, that is take the financial risk directly. Those companies that self-fund usually buy a stop-loss or reinsurance policy that covers claims over some individual and/or aggregate size, and they also usually hire an outside vendor, often a health plan or health insurer, to provide administrative services for the plan. The reasons for self-funding are avoidance of many state regulations due to the federal ERISA preemption provision and the potential for lower overall costs. A study from the Employee Benefits Research Institute presents recent trends in self-funding. (EBRI Note)
Large employers, with their bigger pools of workers, are obviously more able to bear the financial risks that come with self-funding than are medium and smaller firms. The smaller companies can compensate to some extent with lower attachment points for reinsurance, but at some point regulators question whether they are just buying primary health insurance. So it is no surprise that while among all private sector employers self-insurance has risen from 28.5% in 1996 to 39% in 2015, the highest percent is among companies with 500 or more workers, 80% of which had a self-funded plan in 2015, up from 72% in 1996. Medium-sized employers, with 100 to 499 workers, went from 35% with a self-funded plan in 1996 to 30% in 2015, and small companies, less than 100 employees, went from 12% to 14%. Over this time period the percent of all private sector employees covered by self-insurance has also increased, from 46% in 1996 to 60% in 2015. 86% of workers in large companies are now covered by self-insured health plans, an almost 20% increase since 1996. In medium and small companies, self-insured enrollment is basically flat. More recently, since 2013 there has been a sharper increase in the number of small and medium firms adopting self-insurance, which some attribute to passage of the reform law.