More than half of all U.S. workers currently insured have their coverage through self-insured or partially self-insured plans, according to the latest figures compiled by the Kaiser Family Foundation.

And those numbers have risen over the past three years as companies turn to self-insurance to avoid the skyrocketing premiums charged by large insurers.

Self-insurance is praised by some, who credit it with providing an alternative to high-priced health plans, thus giving more companies an incentive to offer insurance to their workers.

Bankruptcy questions

But others caution that self-insurance leaves workers unprotected, particularly in the case of a bankrupt company.

With a self-insured health plan, a company assumes the financial risk of providing health benefits.

Typically, a self-insured business will pay for each medical claim as it occurs instead of paying a fixed premium to an insurance carrier. Often, they hire a separate company to administer the claims.

Although no one tracks the type or size of companies or organizations that self-insure, anecdotally, experts say, they are usually big. That’s because a large pool of employees paying in can absorb a big financial hit such as a premature baby more easily than a smaller pool of workers.

In addition, companies that opt for self-insurance tend to have relatively stable work forces, making it easier for a company to predict health costs.

For many former employees of NorVergence, a fast-growing New Jersey telecommunications reseller that stopped paying claims for three months and went bankrupt in July, self-insurance has meant financial disaster.

Mila Kofman, assistant researcher at Georgetown University’s Health Policy Institute, said the employee has no real protection in such a case.

“The laws don’t really have teeth – there is no safety net,” said Kofman, a former U.S. Department of Labor investigator and critic of the federal laws (known as ERISA) that govern self-insured health plans.

Get in line

Anyone working for a self-insured company that fails to pay medical claims prior to a bankruptcy filing “lines up in bankruptcy court and is considered like any other creditor,” said Kofman, adding that the Labor Department doesn’t have the resources to prosecute every violation.

Self-insurance advocates say the ERISA laws are tough, and point out that company officials responsible for running a self-insured health plan improperly can face prison time.

The Labor Department last year closed 2,939 civil cases with violations and brought criminal indictments in 137 cases. The criminal investigations recovered $10.6 million, according to the Labor Department.

“It’s designed to be fail-safe,” said Frederick Hunt, executive director of the Society of Professional Benefit Administrators.

Hunt said that if claims go unpaid, red flags are raised either by doctors and hospitals or patients who receive the bills. Those people would then, theoretically, complain about the problem and notify the Labor Department.

Some experts say it’s rare for a bankrupt self-insured business to leave employees stuck with bills.

Most companies don’t shut as abruptly as NorVergence, or they keep enough money to pay claims in a separate trust account that can operate through a bankruptcy and shut down without foisting bills onto employees.

But even those in the business admit that self-insurance has flaws.

The third-party administrators, companies typically hired by an employer to process claims, would seem to be perfectly positioned to raise an alarm if a business stops paying claims. But that administrator is often wary both because it has no legal obligation to do so, and stepping in means possibly accepting some legal responsibility – read: liability and costs – if finances at the employer go south.

Besides, said Kofman, the third-party administrator is being paid by the employer. “That’s a real conflict of interest.”