Senator Fitzgerald Questions Self-Insurance

It’s a valid point, but…

On self-insurance, Fitzgerald said lawmakers have always been curious about whether the change would save money. Walker’s proposal would have the state work with several third-party administrators to pay employees’ health claims directly, rather than paying monthly premiums to health insurance companies.

Walker’s office says the move would save $60 million in the next biennium, but Fitzgerald said that was “far less than what most people anticipated.”

The proposal, Fitzgerald noted, would cause some health insurers to lose a major chunk of their current enrollees, raising a possibility that those companies “could falter.”

“Now that you’re not seeing those types of numbers, people are worried about the job loss it could create across the state,” Fitzgerald said.

Self-insurance is a relatively simple concept. When an organization – in this case a government – wants to provide health insurance to their employees, there are a variety of ways to do that. The fundamental issue is the assumption of risk. That’s what insurance is all about. The risk is that the employees being covered will suffer catastrophic health care issues, thus forcing the provider to pay a lot more than the sum of the premiums.

In order to hedge against the risk, most organizations contract with a health insurance company. In that scenario, in exchange for contracted and stable premiums, the health insurance assumes the risk. The organization gets a predictable outflow of cash while the health insurance company gets profit. The profit is the monetization of the risk that the health insurance company assumed.

All self-insurance means is that instead of contracting with a health insurance company, the organization assumes the risk themselves. The organization takes ownership of accepting the premiums and paying out any claims. A few organizations manage all of that themselves, but most still contract with a health care provider for the administrative functions. In the case of self-insurance then, the organization assumes the risk and, as a consequence, saves the profit that they would have otherwise paid to a health insurance company.

Self-insurance is an option for any organization, but it usually only makes sense for large organizations that can spread out the risk. For example, a 10-person shop could self insure, but the costs can vary wildly if one person is pregnant or has a major disease. In contrast, in a 10,000 person shop, the statistical averages come into force and costs become relatively predictable and stable.

Well, there is no larger organization in Wisconsin than state government. The State of Wisconsin can spread the risk among tens of thousands of employees. While it is not a slam dunk decision for the state to self-insure, it is close. The benefits of self-insurance have been proven time and time again, which is why many of Wisconsin’s largest employers like Briggs & Stratton, GM, Kimberly-Clark, Schneider Corp., WE Energies, Rockwell Automation, Kwik Trip, John Deere, Kohler, Washington County, Milwaukee County, Dane County, City of Milwaukee, City of Madison, Madison School District, Kenosha School District, and many more already do it.

The money saved compared to using a health insurance company varies from year to year depending on the expenses, but over the years it will benefit the state to self-insure. After all, if the profit that health insurance companies earn is a function of the risk they assume and they remain extraordinarily profitable most years, it is safe to conclude that the state would benefit from assuming that risk instead of paying the health insurance company to assume it.

Fitzgerald’s point is certainly valid. The state is a massive customer for its health insurance provider(s). If the state self-insured, then those companies would lose a huge customer and the profit that went with it. The consequences of that will almost certainly be some loss of revenue and downsizing. But it is not the role of the taxpayers to prop up private companies. What the taxpayers deserve is the best possible deal that will provide the services required. If legislators do any less, it is a dereliction of their duty to their constituents.

So the JFC should take a good look at self-insurance. But the decision criterion should not be the impact on the companies currently making their profits off of the taxpayers. The decision criterion should be finding the most economical way for the state to provide quality health insurance to its employees.

4 Responses to Senator Fitzgerald Questions Self-Insurance

  1. CaptainNed says:

    State of VT employee here (don’t ask, it was 20+ years ago, I was unemployed, and I answered a newspaper ad).  We’re self-insured, but the State also carries what’s known as a “stop-loss” policy that would cover system expenditures over X level (we’re never told the value of X) and, in some cases, annual expenditures on any individual over Y (with the same caveat).  We also have no lifetime maximum benefit value.  It’s all run by a third-party org, but they’re just paper pushers.

    It’s set up this way so that those few individuals who stress the system (generally cancer, cardiac, and transplant patients) don’t drain the benefits pool for those of us who don’t use much health care.  In most years we receive a “premium holiday” on the last 2-3 paychecks of the year as expenditures have been below collected premiums.

    Oh, and we need another map challenge.  http://www.bootsandsabers.com/wp-content/plugins/wp-monalisa/icons/wpml_cool.gif

  2. Owen Owen says:

    You’re wish is my command…

  3. kjanz1899 says:

    Why not also expand the self insurance pool by taking over insurance for all public school teachers?

  4. insagtman says:

    The state spends about $1.5 billion on health insurance. West Bend Mutual with over 1,000 employees has about $1 billion in sales. The state will be similar to a medium sized insurer as a self insured entity, thus of course this is the right direction to go. The state is not responsible for creating profits of state based companies, whether it’s in the procurement of groceries for our prisons or the cars for our state patrol.  The most cost effective option has to be our first choice.

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