Urban Institute Criticizes Use of Stop-Loss Insurance by Small Employers

If small companies self-insure their health plans and in doing so can get stop-loss coverage with very low attachment points, they could siphon healthy lives away from the new insurance market designed by health reform to insure millions of new lives, the Urban Institute warned in a April 2013 report. The Institute explained that low attachment points would allow those employers to replicate full insurance for significant savings.

In theory, such an uptick might happen, but has not been observed yet, according to the Institute, and probably will not happen until well into 2014, when the health insurance exchange markets have been operating for a while. Stop-loss insurance officials and producers who were interviewed for the report said they are not interested in selling policies to companies that are too small to handle self-funding’s risks and responsibilities. However, the Institute is concerned that might change.

To protect health reform in the event stop-loss insurer attitudes change, the Institute touts state laws imposing on stop-loss insurers minimum attachment points of $60,000 to $100,000. Such attachment points may be easily handled by a large employer, but it would put self-funding out of the reach of employers with fewer than 200 employees, which the Institute says would be a good thing.

The Institute surveyed stakeholders in 10 states, including small employers, insurance producers, health insurers, stop-loss insurers, state insurance regulators and exchange representatives. The report showed not much self-funding among smaller companies. Most insurers and producers do not sell stop-loss to small groups, the report found. But officials from all sides said they would be concerned if groups with fewer than 50 covered lives did self-fund.

Institute Wary About Small Business Self-funding

Self-funding is not appropriate for groups of 100 and smaller, the report stated. Self-funded plans carry more risk than fully insured employer plans. The report noted that smaller companies that self-fund are more susceptible to damage from one or two catastrophic claims, such as premature childbirth, major trauma or conditions like AIDS, hemophilia and cancer. Such charges can outstrip premium receipts and push a plan into extraordinary loss.

Many observers are taking a wait-and-see approach to whether health reform will prompt smaller businesses to opt for self-funding health benefits. Producers have been reticent to promote self-funding arrangements to small businesses, preferring to sell HMO and PPO products. But if the market changes after 2014 they would be prepared to follow demand, the Institute reported.

The Institute listed several factors that could provide new impetus for small businesses to self-fund and/or avoid sending workers to exchanges to get their health benefits.

Avoiding select reform mandates. Self-funded plans are exempt from two insurer mandates. They are not obligated to cover all 10 essential health benefits like plans sold on the exchanges are, and they are not obligated to the $2,000 (single) and $4,000 (family) annual limits on cost sharing that other plans must follow.

The availability of stop-loss policies with low attachment points. The Institute lauds the two states (Oregon and New York) that completely ban the sale of stop-loss to small companies, and recommends bringing the minimum specific attachment point to $60,000. The report did not find many policies with very low attachment points being written by insurers and producers. But it pointed to a few statements by insurers that they might follow the market if it requested policies with low attachment points.

Alternatives to self-funding that the Institute also doesn’t like include: (1) high-deductible health plans backed by a health reimbursement arrangement; (2) stop-loss captives, pooling several small groups together under one stop-loss policy; and (3) dropping insuring workers altogether, and allowing workers to get coverage on an exchange. The last option is particularly attractive to small (fewer than 50 workers) businesses because they will not have to pay a penalty under reform’s play-or-pay provisions for doing this.

The definition of small employer will change from 50 employees to 100 in 2016. This means that more workers can go to get (possibly subsidized) coverage on an exchange without the employer being penalized.

Part of the reason the potential for more self-funding exists is the fact that insurers are raising premiums in response to reform mandates like guaranteed issue, guaranteed renewal, elimination of annual and lifetime limits, dependent care to age 26, preventive services without cost-sharing, and the elimination of pre-existing condition exclusions. Self-insured plans are subject to most, but not all of these requirements.

Insured plan premiums are expected to rise as much as 30 percent as a result of reform, and insurers front-loaded much of those increases in anticipation of the new reform provisions.

Further, reform’s new rating bands for age and tobacco are narrower than industry standards used to date. Rate restrictions (such as job category, gender and medical history) can no longer be used by either insured or self-funded groups.

Stakeholders predicted interest to rise in 2014 particularly in companies from 80 to 100 employees. For instance, Rhode Island officials told the Institute that younger groups may self-fund to avoid premium increases associated with reform’s rating reforms.

Insurers predict the new rating bands will raise premiums on younger, healthier groups. Small self-funded groups inhabited by healthy lives will not be affected by the new rating bands because their younger healthier groups do not have to float the claims of any older sicker insured lives outside of the group.

One producer in New Mexico told the Institute that note that groups of over 50 individuals are used to being underwritten, confronting lasering (a practice whereby stop-loss insurers stop covering a specific individual’s condition, usually after that person has incurred substantial losses) and coverage denials, so “they might as well take on more risks to avoid the taxes and fees in fully insured coverage.” For more information on the advantages and disadvantages of self-funding go to Section 110 of the Guide to Self-Insuring Health Benefits.