More than half of all U.S. workers currently insured have their health coverage through self-insured or partially self-insured plans, according to the latest figures compiled by the Kaiser Family Foundation.
And those numbers have risen over the past three years as companies turn to self-insurance to avoid the skyrocketing premiums charged by large health insurers.
Self-insurance is praised for providing an alternative to high-priced health plans, thus giving more companies an incentive to offer coverage to their workers.
But self-insurance also can leave workers unprotected, particularly in the case of a bankrupt company.
Firm assumes risk
With a self-insured health plan, a company assumes the financial risk of providing medical benefits.
Typically, a self-insured business will pay for each medical claim as it occurs instead of paying a fixed premium to an insurance carrier. Often, they hire a separate company to administer the claims.
Many workers don't realize their company is self-insured, experts say.
That's because most people don't read the fine print in their health plan documents. And, they also may get insurance cards that may list an insurer that only provides a network of doctors or other administrative services.
Although no one tracks the type or size of companies or organizations that self-insure, anecdotally, experts say, they are usually big. That's because the premiums of a large pool of employees can absorb a big financial hit - such as a premature baby - more easily than the funds accruing from a smaller pool of workers.
In addition, self-insured companies tend to have relatively stable work forces, making it easier to predict health costs.
For many former employees of NorVergence, a fast-growing New Jersey telecommunications reseller that stopped paying claims for three months and went bankrupt in July, self-insurance has meant financial disaster.
Mila Kofman, assistant researcher at Georgetown University's Health Policy Institute, said employees have no real protection in such a case.
"The laws don't really have teeth - there is no safety net," said Kofman, a former U.S. Department of Labor investigator and critic of the Employee Retirement Income Security Act (ERISA), the federal law that governs self-insured health plans.
Anyone working for a self-insured company that fails to pay medical claims prior to a bankruptcy filing "lines up in bankruptcy court and is considered like any other creditor," said Kofman, adding that the Labor Department doesn't have the resources to prosecute every violation.
Self-insurance advocates say the ERISA law is tough. Company officials responsible for running a self-insured health plan improperly can be sent to prison, they say.
In 2003, the Labor Department closed 2,939 civil cases with violations and brought criminal indictments in 137 cases. The criminal investigations recovered $10.6 million, according to the Labor Department.
"It's designed to be failsafe," said Frederick D. Hunt Jr., executive director of the Society of Professional Benefit Administrators.
Doctors, hospitals and patients raise red flags if claims go unpaid, Hunt said. Theoretically, those people would notify the Labor Department.
Some experts say it's rare for a bankrupt self-insured business to leave employees stuck with bills. Most companies don't shut down as abruptly as NorVergence, or they keep enough money to pay claims in a separate trust account that can operate through a bankruptcy and shut down without foisting bills onto employees, the experts say.
But even those in the business admit that self-insurance has flaws.
Third-party administrators, companies typically hired by an employer to process claims, would seem to be perfectly positioned to raise an alarm if a business stops paying claims.
But that administrator is often wary both because it has no legal obligation to do so, and stepping in means possibly accepting some legal responsibility - liability and costs - if the employer's finances go south.
Besides, Kofman said, the employer is paying the third-party administrator. "That's a real conflict of interest," he said.