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California measure that would deter self-insurance of medical risk by small employers advances

To insure or self-insure?  That’s the policy question underlying pending California legislation that passed its first committee test this week.  SB 161 is designed to reduce the incentive for small employers to self-insure their workforces for medical costs by making it less feasible for these employers to limit their losses once they reach a certain point.  Supporters of the bill maintain it’s needed to give the state health benefit exchange’s Small Business Health Options Program (SHOP) the opportunity to bring down insurance rates by aggregating small employers’ purchasing power into a single buying mechanism starting in 2014.  Click here for an analysis of the measure prepared by the Senate Health Committee, which passed out the bill May 2.  A similar bill stalled in 2012.

Self-insurance arose as a solution for small employers beleaguered by rising small group insurance premiums over the past decade.  But self-insuring medical risk is a high risk proposition for small employer since unlike large employers, they are unable to spread the risk of a large claim over a sizable group of employees.  That’s why it’s a no go for small employers without “stop loss” coverage to kick in when an individual employee’s or all employees as a group incur losses in a policy year exceeding a set amount.  SB 161 would bar stop loss coverage from protecting a small employer until an individual employee incurred medical bills of $65,000 or those of the entire workforce reach dollar amounts specified in the bill.

Opponents of the bill argue that the market should determine which approach works best for small employers: self-insurance or insurance.  Other issues cause consternation among supporters of the measure.  Only larger small employers are likely to consider self-insurance given the inherent risk that favors size.  That could leave the SHOP with the low end of the small group segment – employers having less than 20 to 30 employees.  This could reduce the SHOP’s market power with health plan issuers since there would potentially be fewer “covered lives” and larger employers to bring to the bargaining table.  (In California, the small group market is employers with 50 or fewer employees.)

Apparently concerned about stop loss coverage’s potential to undermine the SHOP exchange marketplace, the U.S. Department of Health and Human Services issued a proposed rule April 5, 2013 barring entities with relationships to issuers of stop loss insurance, including those who are compensated directly or indirectly by issuers of stop loss insurance, from serving as exchange navigators.

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Stop loss coverage for small self-insured employers getting attention again in 2013

About a year ago, this blog noted concern among policymakers over small employers opting out of small group health insurance by self-insuring and buying stop loss insurance to defray the cost of major claims.  The concern is stop loss coverage that kicks in when a claim reaches as little as $10,000 to $20,000 could adversely affect the Small Business Health Options Program (SHOP) of state health benefit exchanges by making self-insurance a more appealing option than usual for small employers who typically don’t self-insure.

SHOPs function as marketplaces for small employers to purchase health insurance, aggregating their purchasing power into a single risk pool to enable them to get better premium rates than they could otherwise obtain on their own.  The issue was covered this week by Kaiser Health News (KHN).  The KHN story quoted a stop loss consultant describing the bulk of small employers interested in self-insurance paired with stop loss coverage as having 25 to 30 workers – right in the sweet spot for SHOPs that like California’s that will serve employers with up to 50 employees.

In California, legislation that would have increased the minimum attachment point of stop loss coverage to make it less palatable for most small employers died in committee last year.  The legislation has been recycled in the current session as Senate Bill 161, which would outlaw stop loss coverage with an attachment point of $95,000 per employee, $19,000 times the total number of covered employees and dependents, or 120 percent of expected claims – whichever is greater.

Undermining demand in the SHOP market isn’t the only concern. Some fear adverse selection in the small group insured market as a whole if small employers with mostly younger workers self-insure their workforces for medical risk, leaving insurers to cover older, higher cost workers.  Michael Ferguson, chief operating officer at the Self-Insurance Institute of America, downplays the prospect, telling KHN small employers can also face large claims from younger employees.

California legislation limiting self-insured small employer medical stop loss coverage moves forward

April 27, 2012 1 comment

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-insurance trend in small group market seen as threat to actuarial integrity of SHOPs

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.

Growing interest in self insurance among mid-sized California employers

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.

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