California legislation limiting self-insured small employer medical stop loss coverage moves forward
California lawmakers are concerned a trend of small employers self insuring their employee health benefits and purchasing stop loss coverage for cases when a given worker incurs high medical bills will play havoc with the state’s small group health insurance market. The chief concern is the arrangement will further reduce an already shrinking and distressed market segment and foster adverse selection as the state prepares to bolster the market starting in 2014 with a Small Business Health Options Program (SHOP) offered through the California Health Benefit Exchange.
Lawmakers are responding by imposing restrictions on medical stop loss coverage with SB 1431, legislation sponsored by California Insurance Commissioner Dave Jones and approved this week by the Senate Health Committee setting higher attachment points for the insurance. Stop loss coverage has been reportedly offered with attachment points as low as $10,000 to $20,000. Combined with a $1,000 to $2,000 deductible, employers would be responsible for an employee’s medical bills in a relatively narrow window above the employee deductible and below the stop loss attachment point. Stop loss insurance kicks in when an employee’s medical costs exceed the attachment point.
“SB 1431 is necessary to prevent the state’s small group market from falling victim to adverse selection and unsustainable premium levels and protecting California’s small businesses, its employees, and the success of the post-ACA (Affordable Care Act) insurance market,” the committee’s analysis notes.
Self-insuring health benefits has traditionally been the province of large employers that could afford to assume the risk of paying much of their employees’ health care costs. Smaller employers with too few workers to feasibly spread that risk have traditionally relied on insurance as a risk transfer mechanism.
In a sign of how distressed the small group health insurance market has become, that notion is being turned on its head. Now small employers are shunning insurance and self-insuring their health benefit risk — to a certain point. After an employee’s medical costs hit a set amount, stop loss insurance kicks in. That “attachment point” as it’s referred to in insurance terminology can be as low as $10,000 to $20,000, according to this Los Angeles Times article.
As the Times reports, the practice is stoking controversy and raising concern it could steer small employers away from Small Business Health Options Programs (SHOPs) being set up under the state health benefit exchange component of the Patient Protection and Affordable Care Act (PPACA). Beginning in 2014, SHOPs will allow small employers to offer employees a variety health plans like so-called “cafeteria plans” offered by large employers. The concern is without sufficient participation by employers, the SHOP plans could face increased risk for adverse selection by limiting the size of the SHOP’s risk pool.
While not directly saying so in the Times story, California’s insurance regulator is sufficiently alarmed by the potential threat to the actuarial integrity of that state’s yet to be formed SHOP that he wants legislation that would require higher attachment points for self-insured small employer health stop loss coverage. That would also make self-insurance a less attractive option for small employers than getting coverage through the Golden State’s SHOP, reducing the SHOP’s spread of risk. The California Health Benefit Exchange issued a solicitation last month seeking bids to help it design its SHOP.
As group health insurance premiums continue to rise, HealthLeaders-InterStudy reports growing interest among mid-sized California employers in directly paying employee medical costs, known as self insurance.
The findings are reported in HealthLeaders-InterStudy’s proprietary California Health Plan Analysis. The report notes CIGNA HealthCare is seeing “significant sales increase” in a self-funded product tailored to smaller groups, adding that other California group health insurers are expected to respond by developing self-funding products offering financing plans to mitigate the risk associated with paying all of a group’s medical claims.
Most importantly, since employers will be paying for their workers’ health costs out of their own coffers, they will have far greater incentive to promote employee wellness and management of chronic conditions. So far, workplace wellness efforts have produced a mixed verdict in terms of their effectiveness.