The Risks And Rewards Of Self-Insuring

For more than 20 years, Tropical Financial has bypassed traditional insurance coverage to pay employee medical expenses out of pocket.


By 2015, when the Affordable Care Act takes effect for all employers, the health care options for credit unions might seem like a choice between two extremes. Credit unions can either pay stiff penalties for dropping employee health plans and pushing staff onto health exchanges or potentially pay higher premiums to satisfy the legislation’s more stringent coverage requirements. But there ’s also a third option: self-insurance.

That’s the path Tropical Financial Federal Credit Union ($555.4M, Pembroke Pines, FL) chose more than 20 years ago. Unlike a fully insured employer, which relies on an insurance company to cover employees and their dependents in exchange for a fixed monthly premium, a self-insured employer acts as the insurer instead. Although an insurance company still administers the plan, Tropical Financial pays its employees’ medical expenses directly.

The rewards and risks can be substantial. The credit union enjoys lower costs and fewer regulations by self-insuring and expects to spend about $1.6 million to cover 172 employees in 2013, saving about 4% compared to full insurance and nearly 6% once health care reform is fully implemented. Still, employee medical expenses vary each month depending on the number of claims filed and can spike suddenly if just one employee becomes seriously ill.

“If you’re lucky, the costs can be minimal,” said Tropical’s chief financial officer, Ralph Cheplak, during a Callahan webinar on self-insurance. “If you’re not, your costs can exceed those for a typical insurance plan.”

Callahan Leadership Clients

Interested in learning more? Hear Ralph Cheplak talk about self-insurance. Only on

Listen Now


Nevertheless, when Tropical Financial compares its claims costs against insurance premiums, self-funding has been the consistently cheaper option every year. That’s despite having fewer than 200 employees, the threshold at which the credit union would consider switching back to full insurance.

The Buck Stops Here

One reason self insurance is less expensive is that it eliminates the middleman fees and profit margins of insurers, whose premiums are based on a broader pool of health risks and not just on the health of the credit union’s own employees. By self-insuring, a credit union pays only for the medical bills of its staff along with reinsurance and the modest cost of hiring an insurer to administer the plan.

Meanwhile, if employees use less health care than expected, the credit union reaps those savings immediately instead of waiting years for that behavior to be factored into the premiums. Plus, only federal ERISA laws apply to self-insured employers, who avoid more cumbersome state regulations and taxes, which range between 2% and 3% of insurance premiums.

Self-funding also gives Tropical Financial more control over the design of its health plan, including which physician networks are used. Tropical currently offers three plans, including a PPO, HMO, and a consumer-driven option, splitting the costs of medical expenses 80/20 with employees.  

Even the risks of astronomical medical bills are kept to a manageable minimum. Because Tropical Financial carries stop loss insurance, the credit union is only responsible for paying the first $85,000 in medical claims per employee, with reinsurance covering costs above that amount. That limit, though, has risen steadily from $55,000 just several years ago. Reinsurance also caps the aggregate of all medical claims the credit union is responsible for at $1 million. Tropical Financial works closely with an insurance agent to estimate its health care costs annually so it can calculate how much stop loss coverage it needs. In addition, the credit union recommends having at least one person on staff to keep track of costs and other details.

A Plan to Keep Costs Down

It’s just as well that self-insurance pays off because switching back to full insurance is an expensive endeavor. Tropical would need enough cash on hand to pay the premiums for full insurance and the lagging medical expenses of employees from when it was self-insured. Typically, that means funding two health insurance systems simultaneously for at least six months until the last medical bills trickle in.

Tropical has found ways to stack the deck in favor of remaining self-insured by minimizing medical costs and educating employees to be savvy health care consumers. In 2010, Tropical introduced its high-deductible consumer-driven plan as a way to do both. The plan combines a tax-sheltered health savings account, which the employee uses to pay routine medical expenses, with high-deductible coverage for catastrophic illness. Employees in consumer-driven plans tend to become more informed health care users because they must set aside enough money in a health savings account to cover medical expenses.

To encourage participation in the consumer-driven option, Tropical began educating its staff about the savings the plan offered. The employee’s share of the consumer-driven premium is more than 50% less than the HMO’s, but the credit union also contributes $300 to an employee’s health savings account for someone with individual coverage and $700 for employees with dependents. The credit union also raised deductibles for the other two plans to more closely match the consumer-driven option. As a result, the number of participants in the consumer-driven plan has risen from 9 to 30 employees in just three years, helping to reduce overall costs 12%.

Tropical, though, wants all employees to become savvy health care users, not just those in the consumer-driven plan. So the credit union reduces employees’ share of the premium if they participate in a confidential health risk assessment. Working with its plan administrator, Tropical also makes health care costs more transparent, raising awareness among employees about the dramatic difference in price for the same medical procedure at various locations. For one procedure, the cost ranged from $200 at one facility to more than $2,000 at another.




Sept. 30, 2013


  • Wow - this is a savvy and wonderful way to show your staff and members - your true money smarts!
    Kathi Quinn
  • Very interesting article and obviously great timing. I am in the insurance business and have advocated cu's to form captive reinsurance companies for years. NCUA blocks cu's from doing this, but this is the next best thing.
    Bob Passmore