Some Employers Could Opt Out of Insurance Market, Raising Others’ Costs

The New York Times by Robert Pear –

February 17, 2013

Federal and state officials and consumer advocates have grown worried that companies with relatively young, healthy employees may opt out of the regular health insurance market to avoid the minimum coverage standards in President Obama’s sweeping law, a move that could drive up costs for workers at other companies.

Companies can avoid many standards in the new law by insuring their own employees, rather than signing up with commercial insurers, because Congress did not want to disrupt self-insurance arrangements that were seen as working well for many large employers.

“The new health care law created powerful incentives for smaller employers to self-insure,” said Deborah J. Chollet, a senior fellow at Mathematica Policy Research who has been studying the insurance industry for more than 25 years. “This trend could destabilize small-group insurance markets and erode protections provided by the Affordable Care Act.”

It is not clear how many companies have already self-insured in response to the law or are planning to do so. Federal and state officials do not keep comprehensive statistics on the practice.

Self-insurance was already growing before Mr. Obama signed the law in 2010, making it difficult to know whether the law is responsible for any recent changes. A study by the nonpartisan Employee Benefit Research Institute found that about 59 percent of private sector workers with health coverage were in self-insured plans in 2011, up from 41 percent in 1998.

But experts say the law makes self-insurance more attractive for smaller employers. When companies are self-insured, they assume most of the financial risk of providing health benefits to employees. Instead of paying premiums to insurers, they pay claims filed by employees and health care providers. To avoid huge losses, they often sign up for a special kind of “stop loss” insurance that protects them against very large or unexpected claims, say $50,000 or $100,000 a person.

Such insurance serves as a financial backstop for the employer if, for example, an employee is found to have cancer, needs an organ transplant or has a premature baby requiring intensive care.

In a report to clients last year, SNR Denton, a law firm, wrote, “Faced with mandates to offer richer benefits with less cost-sharing, small and midsize employers in particular are increasingly considering self-insuring.”

Officials from California, Maine, Minnesota, Utah, Washington and other states expressed concern about the potential proliferation of these arrangements at a recent meeting of the National Association of Insurance Commissioners.

Stop-loss insurers can and do limit the coverage they provide to employers for selected employees with medical problems. As a result, companies with less healthy work forces may find self-insuring more difficult.

Christina L. Goe, the top lawyer for the Montana insurance commissioner, said that stop-loss insurance companies were generally “free to reject less healthy employer groups because they are not subject to the same restrictions as health insurers.”

Insurance regulators worry that commercial insurers — and the insurance exchanges being set up in every state to offer a range of plan options to consumers — will be left with disproportionate numbers of older, sicker people who are more expensive to insure.

That, in turn, could drive up premiums for uninsured people seeking coverage in the exchanges. Since the federal government will subsidize that coverage, it, too, could face higher costs, as would some employees and employers in the traditional insurance market.

Large employers with hundreds or thousands of employees have historically been much more likely to insure themselves because they have cash to pay most claims directly.

Now, employee benefit consultants are promoting self-insurance for employers with as few as 10 or 20 employees.

Raeghn L. Torrie, the chief financial officer of Autonomous Solutions, a developer of robotic equipment based in Petersboro, Utah, said her business started a self-insured health plan for its 44 employees on Jan. 1 as a way to cope with the uncertainties created by the new law.

“We have a pretty young, healthy group of employees,” she said.

In Marshfield, Mo., J. Richard Jones, the president of Label Solutions, an industrial label-printing company with 42 employees, said he switched to a self-insurance plan this year “to hold down costs that were going up because of government regulation under Obamacare.”

The Township of Freehold, N.J., made a similar decision in January to gain more control over benefits and costs for its 260 employees.

The township, which spends more than $5 million a year on employee health benefits, had been seeing premiums rise 10 percent to 20 percent a year. Under the new arrangement, Peter R. Valesi, the township administrator, said, “We expect to stabilize our rates and keep the money we save, rather than giving it to health insurance companies as profit.”

Employers and their advisers view self-insurance as a possible way to avoid the costs and constraints of the health care law.

The Obama administration is investigating the use of stop-loss insurance by employers with healthier employees, and officials said they were considering regulations to discourage small and midsize employers from using such arrangements to circumvent the new health care law.

“This practice, if widespread, could worsen the risk pool and increase premiums in the fully insured small group market,” the administration said in a notice in the Federal Register.

Republican senators have told the Obama administration not to even consider new rules.

Starting in 2014, most Americans will be required to have medical coverage. Under the law, health insurers cannot deny coverage or charge higher prices to people who are sick. But stop-loss insurance, for catastrophic claims, is not regulated as health insurance.

Stop-loss carriers often require employers to identify employees who have been treated for certain expensive conditions, including H.I.V. or AIDS, cancer, diabetes, obesity, sickle-cell anemia, heart attack, stroke and complications of pregnancy. The carriers may limit or deny coverage for those conditions or those individuals.

The New Jersey Department of Banking and Insurance found that “some writers of stop-loss policies have been selectively marketing coverage to small employers on the basis of the health history” of employees, and “denying coverage to employers based on employee health status.”

The agency described this as cherry-picking and said it constituted “an unfair trade practice.”

In an interview, Dave Jones, the California insurance commissioner, said, “We see a disturbing increase in the marketing of stop-loss insurance to small employers with healthy employees.”

Michael W. Ferguson, the chief operating officer of the Self-Insurance Institute of America, a trade group for companies in the self-insurance marketplace, said, “We don’t think there is a problem.”

He denied that his members were trying to dodge insurance mandates or exploiting loopholes.

The new law reduces the risks of self-insurance. Previously, self-insured companies would have struggled to switch to the insured market if employees developed costly illnesses. Under the law, companies can switch with no penalty, as insurers generally “must accept every employer and individual” who applies for coverage.

Source: John & Rusty Report via Choice Admin