It’s become increasingly common for even smaller employers to explore self-insurance as a way to bring health costs back under control. But beware of hidden traps.

If your organization is weighing self-insurance – or has already taken it – here are three pitfalls that can create unexpected costs.

1. Unfavorable employee mix

It’s impossible to completely eliminate the risk of unexpected, high-dollar health claims. But here’s a guideline to lower your risk. Health claim stats suggest the “ideal” employee population for a self-insured plan is predominately young, non-smoking and male. If this doesn’t match your employee population, your costs may be higher.

Be aware that stop-loss insurance carriers often “laser” those employees considered higher risk. Lasering means that your company would have to pay out much more in claims for these employees before the stop-loss coverage kicks in.

2. Loss of network discounts

Some firms learned after the fact that going the self-insurance route caused them to lose providers’ network discounts they previously received under fully insured plans. When evaluating plan vendors’ administration-only options, ask:

• Will the vendor’s network alliances work in your best interests, cost-wise?
• Will the vendor only oversee claim payments or negotiate to build the best provider network, quality-wise, for your employees.

Bottom line: You should get the same kinds of plan designs, networks and discounts as a fully insured plan.

3. Wasteful reinsurance contracts

If the language of your reinsurance contract doesn’t match your health plan’s summary plan description, you may be paying for coverage you don’t need and can never use.

It’s also key to make sure your firm has enough money in reserve to cover run-out claims and other costs that may occur before reinsurance will cover payments. Best practice: annual audits of your financial reserves.