How Much Risk Is Too Much for Small Businesses?


How Much Risk Is Too Much for Small Businesses?

Photograph by Eric Bean/Getty Images

That’s the question states around the country are asking as they consider restricting how employers can set up their health insurance plans. Colorado lawmakers will hold a hearing April 9 on a bill aimed at keeping small businesses in the state insurance market at a time when some are considering self-funded plans that can be cheaper and skirt some of the requirements of Obamacare. What happens there and in other states could affect how much small groups pay for health coverage next year.

First some background: A company has two ways to provide health insurance to workers. In the conventional “fully insured” approach, an employer buys a policy from an insurance company such as WellPoint (WLP) or Aetna (AET), paying a premium for the insurer to cover the risk of medical claims. The other method, called self-insurance or self-funding, essentially makes the employer the insurance company. The business sets aside money for the plan and pays employee’s medical claims directly. In this scenario, employers come out ahead if medical costs are less than expected. They’re also on the hook if the costs are higher.

To reduce their exposure to big, unexpected medical claims, self-insured companies often buy “stop-loss” policies, a form of reinsurance that pays the employer if workers’ health costs hit a certain level. (It’s similar to a deductible on an individual insurance policy, only paid by the employer.) If these ceilings are low, the employer is essentially selling off most of its risk to the stop-loss insurer. Colorado currently lets stop-loss policies kick in once an employee has incurred $15,000 in medical claims. The proposed law would double that level. It’s saying to employers: If you’re not ready to shoulder more risk, you shouldn’t be self-insuring.

Self-funding is most common in large businesses. That’s because the risk of any insurance pool becomes more predictable the larger it is, so self-insuring is easier with 5,000 employees than with 50. But it’s becoming more appealing to small businesses for a couple of reasons. Self-funded plans are exempt from some aspects of Obamacare, such as the rule that details what essential health benefits a plan must provide. Employers that generally have younger, healthier workers can sometimes save money by self-funding, rather than paying premiums that subsidize the medical costs of less healthy workers in other companies. (That, of course, is how health insurance works: The healthy subsidize the sick, because no one can predict who may be sick tomorrow.)

Here’s why this is a big deal: “If small businesses are opting to self-insure and purchase stop-loss insurance because they’re betting on the health of their employees, they’re going to be keeping healthy groups out of that small group marketplace,” says Serena Woods, director of strategic engagement at the nonprofit Colorado Consumer Health Initiative. This is known as adverse selection: The insurance risk pool gets worse as healthy groups leave, driving up premiums for whoever is left. An Urban Institute analysis suggests that this effect could drive up premiums for small businesses that want to buy traditional insurance by as much 25 percent.

About half the states regulate stop-loss insurance in some way. New York, Delaware, and Oregon ban insurers outright from selling stop-loss policies to small groups. In addition to Colorado, lawmakers in California, Utah, Minnesota, and Rhode Island are weighing new rules, according to the Colorado Consumer Health Initiative.

The Self-Insurance Institute of America, a Washington (D.C.) nonprofit that advocates for self-funded plans, says the Colorado bill would hurt companies that depend on stop-loss policies to provide affordable health plans. “Given that smaller employers in particular face significant financial challenges in providing quality health benefits for their employees and their dependents, it is more important than ever that they have as many coverage options as possible, including self-insured group health plans,” Michael Ferguson, the group’s chief operating officer, wrote in a letter to lawmakers.

Small businesses don’t always have a handle on the risks that come with self-funding. Insurers aren’t required to renew stop-loss policies and they can carve out individual sick workers for more expensive reinsurance, a practice known as lasering. A report out today from researchers at the Georgetown Health Policy Institute suggests that “self-funding exposes small businesses to too much financial and legal risk.”