Darryl Spellman never thought much about his company health plan until medical bills stamped "Unpaid" began arriving in the mailbox and collection agents started calling on the phone.
"I'm getting stuck with all their bills," said Spellman, a 26-year-old Simi Valley resident, of the $2,500 worth of medical claims that have gone unpaid by his former employer, Calmark Development, a Los Angeles-based real estate development firm.
While Spellman and fellow employees continued to pay for insurance through payroll deductions, the company has never fully explained why it won't pay the bills. Some employees say the firm ran into trouble after being hit with higher-than-expected medical claims.
"I tell them the bills are going to collection, and (Calmark says) 'We don't know what to tell you,' " said Spellman.
State insurance regulators and lawyers don't know what to tell him, either.
Of big employers that provide health insurance to their workers, Calmark is among the majority of large firms--those with more than 100 workers--which, over the past few years, have sought relief from spiraling health-care costs by canceling insurance policies and paying employee medical claims themselves.
While the strategy is designed to save cash, it also insulates employers from state insurance regulations and penalties as well as law suits under state regulations, which permit much higher damage awards than federal statutes. Employees in self-insured companies are left protected only by federal laws that critics say are weak and by agencies that are understaffed.
The potential for problems has grown as self-insurance has spread from large corporations--where problems have been relatively few--to smaller firms that may lack the deep pockets to cover medical claims, state officials say.
The practice has allowed some companies to deny coverage to groups of individuals with diseases that may require costly care, including employes stricken with cancer or AIDS.
Self-insured firms "are outside of our reach," said Walter Zelman, special deputy for health insurance at the California Department of Insurance. "Employees are much more (dependent upon) the employer. They have very little recourse."
However, both critics and supporters of self-insurance agree that most such plans are well managed--and, indeed, often offer coverage that exceeds state requirements.
The critics, moreover, often have a vested interest in seeing the plans fall under state control, said James A. Kinder, executive vice president of the Self Insurance Institute of America, a Santa Ana-based trade group of employers and insurance administrators.
"Attorneys don't like this because they don't have the ability to take on cases on a contingency basis," Kinder said.
Despite the debate over the merits of self-insurance, it has grown rapidly during the past 20 years. At least 11 million workers at medium- and large-size companies were covered by self-insured plans, according to a 1988 survey by the Bureau of Labor Statistics. That was up from about 5 million workers in 1982.
With self-insurance, businesses assume that they will save money by paying employee medical claims directly instead of paying an insurance company to shoulder the risk. Industry officials claim that companies can reduce their health-care costs as much as 20% annually by self-insuring.
Such savings appear all the more attractive in light of what the Labor Department says are 20% annual increases in employee health-care costs.
"By being self-insured, you can invest your money in the bank and earn interest" instead of paying premiums, said Art Young, benefits manager at Hewlett Packard, the Palo Alto-based high-technology firm that adopted the method in 1976.
But many in the insurance field acknowledge that self-insurance has proved more effective in managing cash flow than limiting health-care costs, which continue to rise.
"Employers looked at self-insurance and said, 'This is a way we can really control our costs,' " said Kevin Swanson of Buck Consultants, an employee benefits advisory firm. "But it isn't. It really is a financial vehicle."
Another major attraction for companies--and a prime concern of critics--is that self-insurance is insulated from state laws that regulate insurance companies. Those rules require insurers to offer types of coverage--ranging from alcoholism rehabilitation to hair transplants--that business groups blame for inflating health-care costs.
Self-insured firms instead must abide by the Employee Retirement Income Security Act of 1974. Intended to protect employee pensions, ERISA--which is administered by the Labor Department--has been extended to cover self-insurance as well.
Advocates say federal regulation gives employers some of the flexibility they need in a time of skyrocketing health costs.