Short Term Disability – Self-Insure for Long-Term Cost Savings?

Benchmark data suggests that most companies provide company paid Short-Term Disability(STD) benefits to their employees. According to SHRM’s 2016 Employee Benefits survey, which looks at recent offerings, STD benefits are provided on an employer paid basis by 70% of employers and have remained relatively consistent for the past 5 years.

Employer provided Short-Term Disability benefits typically provide employees a percentage of their salary while they are temporarily disabled (i.e. unable to work for a short period of time due to a sickness or injury that is unrelated to their job).  Many employers choose to insure this benefit, buy an insurance policy from a reputable carrier, and pay monthly premiums (fully insured).

When discussing these benefits with my clients, I often challenge this practice. When purchasing insurance, you are paying a monthly premium for all employees regardless of the number that actually use the benefit.  In addition, in a year where usage of the benefit is high (i.e. high number or volume of claims), employers are often faced with double digit premium increases going into the following year.

I would challenge that employer’s consider self-insuring this benefit.  In most cases, an employer has already budgeted for the salary of any employee in any given fiscal year.   If that employee where to become disabled, the employer could have a written Short-Term Disability policy stating what % of pay that employee would receive while temporarily disabled. The employer would then pay that percentage directly to the employee.   For example, if the STD policy stated that the temporarily disabled employee would receive 60% of pay for 12 weeks, the employer would pay the employee 60% of pay for 12 weeks (instead of 100% as budgeted.)  This practice should enable the employer year-over-year savings in premium dollars and salary costs.

However, I would not advise any employer to directly receive protected health information (PHI) or make judgement on paying claims based on this information. Most employers should be aware of the restrictions on receiving and viewing protected health information.  A viable solution to making such judgments on your own is to pay a fee to have an insurance company evaluate the paperwork as well as the doctor’s diagnosis and prognosis.  The insurance company can then advise the employer on approval and appropriate payment time frame.  This service is commonly known as “advice to pay”.

Employers and/or their benefits consultants can easily do an analysis of the costs of insured vs. self-insured Short-Term Disability offerings to understand the potential cost savings available over the short and long term.   While the savings of paying a fully insured premium versus paying for advice to pay services may not seem significant in the first year, it can often add up over several years (taking into account insurance premium increases/decreases, salary increases, etc.).   Should the employer decide to self-insure, a clearly written policy should be implemented, distributed and updated regularly.