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Insurance markets can be unraveled by adverse selection: If people who need insurance less don’t pay into the risk pool, that raises the costs for everyone left. That’s why the health-reform law has mandates for both individuals and employers with 50 or more employees: Everybody pays in to make insurance affordable.
Federal regulators are now scrutinizing whether small companies with relatively healthy employees will pull out of the group health insurance market by self-insuring—meaning the companies take on the risk of paying for employees’ medical care. That could make premiums for traditional health insurance plans, where an insurance company bears the risk, unaffordable for the businesses that remain.
Stop-loss policies are insurance agreements that employers can buy to limit the amount of risk they take on when self-insuring. In a Federal Register notice posted on May 1, three agencies are requesting information about stop-loss insurance. A company might agree, for example, to pay for up to $50,000 of medical claims for any individual employee, and beyond that level, the stop-loss carrier pays.
Regulators from the departments of Labor, Treasury, and Health and Human Services want to know where stop-loss policies are setting that level, known as an “attachment point” and analogous to an individual’s deductible. If it’s low enough, the employer isn’t taking on much risk but does enjoy exemptions from state insurance requirements and taxes that don’t apply to self-insured plans.
What’s prompting the request? Regulators may be examining whether employers with healthier-than-average workforces will use a combination of self-insurance and stop-loss policies to drop out of group health insurance markets. The request notes:
“This practice, if widespread, could worsen the risk pool and increase premiums in the fully insured small group market, including in the Small Business Health Options Program (SHOP) Exchanges that begin in 2014.”
The notice may signal regulation ahead, though it doesn’t necessarily mean the federal government will act. At the state level, the California Senate is considering a bill that would bar the sale of stop-loss policies that pay out below $95,000 of individual medical claims. The legislation, backed by the insurance commissioner, essentially forces self-insured employers to cover at least that amount of risk.
Advocates for self-insuring oppose such limits. “We argue strongly that it’s an incorrect perspective that only healthy groups will leave the exchanges and self-insure,” says Jay Fahrer, government relations director at the Self-Insurance Institute of America, whose members include self-insured companies and stop-loss insurers.
Fahrer says employers don’t know how healthy their workers are because they often don’t have access to claims data from their insurance companies. He also cited a Rand Corp. study that suggested adverse selection through self-insurance is not likely to be a problem.
That report says “it is unlikely that a large number of small businesses will opt to self-insure after [health-care reform] takes full effect, unless comprehensive stop-loss coverage becomes widely available at prices that compete with fully insured products.” The new request for information signals that regulators are at least watching that question.