In some states, self insurance is a valid option, while in others it’s practically impossible. HealthBiz Decoded takes a look at the potential long-term consequences of this growing trend.
Small companies with fewer than 100 employees entering the insurance exchanges this fall have a decision to make. Should they shell out for marketplace premiums, or pay less to self-insure, cherry picking which benefits they provide to employees?
Self-insured firms don’t have to pay the insurer’s fee. This gives them up to a three percent price advantage over fully insured firms, which makes self-insurance less expensive.
However, self-insurance carries more risk – if one employee suffers a catastrophic accident or illness, that could leave their employer paying hundreds of thousands of dollars for medical care, enough to devastate a small firm with a carefully balanced budget.
To mitigate that risk, those who choose to self-insure often buy stop-loss plans that go into effect if an individual’s insurance claims go over a certain point, like $30,000. With a special plan to cover worst-case scenarios, some small firms are taking the plunge, but that could change the coming exchange landscape, experts say.
Ever Smaller and Expensive Pools?
“If a significant number of smaller employers with healthier populations decide it’s financially better to go self-funded than through the exchanges, you’ll have what is called anti-selection,” according to Richard Stover, insurance specialist and principal at Buck Consultants, A Xerox Company.
Anti-selection will happen when small companies with sicker employees won’t be able to afford to finance their own insurance plan, and will have to shop on the exchange, he said. Healthy people are “selected” to be off the exchanges, whereas sicker people are selected to be in the exchanges.
“The premise of healthcare insurance exchanges is that you’ll get a broad mix of people, and in particular you’ll pull in healthier lives as well as unhealthy lives – a public risk pool of good and bad,” Stover explained.
“If mostly sicker people enter the exchanges while firms with healthier employees self-insure, the exchange pool as a whole will get sicker and rates will go higher. The higher rates might further dissuade employers from going into the exchanges, and the situation spirals to an ever smaller and more expensive pool.”
It’s not likely to happen too much in 2014, since for the most part rates haven’t been made public yet, Stover pointed out, but the spiral could potentially grow over time.
Concerned about that spiral, some states are putting higher limits on stop-loss insurance to try to prevent employers from doing it. When stop-loss plans can only kick in at higher claims, like $500,000, fewer firms will take the risk to self-insure.
On the other extreme, some states, like New York, are imposing no regulations, and allow stop-loss plans to set limits at any point. That could lead to more companies in New York self-insuring and push rates on the exchange higher by as much as 25 percent, according to a 2012 study by The Urban Institute.
“A number of states really don’t regulate stop-loss insurance at all, and a handful of other states completely ban it, and there are a number of cases in between” Matthew Buettgens, Ph.D., Senior Research Associate at The Urban Institute and lead author of the study, told HealthBiz Decoded.
‘A Very Real Concern’
His study analyzed different stop-loss limits and assessed the effect that would have on the insurance market. With very high limits, there was little impact on the markets,
“There’s a range of outcomes there, and it’s going to depend on individual states and what they do,” Buettgens said.
“Our research shows that it is potentially a very real concern for states that choose not to regulate stop-loss insurance,” he said. “It will be more difficult to legislate once the exchanges are active.”
General health policy makers should be more aware of this issue, he pointed out, but state decision makers have been bombarded with many issues, and this is just one more that could get lost in the shuffle.
Buettgens’ outlook isn’t too grim. More regulation is needed, he said, but, failing that, the market will reach an equilibrium point eventually.
“It won’t be a complete death spiral,” he said.