Tipping point

Nashville-based health benefits consultant Austin Madison says he's surprised that many of his small-business clients are asking him about a type of health plan that historically has appealed only to larger employers.

Self-insured health benefit plans—in which the company pays directly for its employees' healthcare expenses and buys stop-loss insurance to protect against catastrophic costs—have been popular for employers with more than 500 employees for a long time.

But some experts say provisions of the Patient Protection and Affordable Care Act that go into effect in 2014 could provide a tipping point toward self-insurance among smaller groups. The appeal of self-insurance is that such plans will be exempt from many key ACA provisions, such as providing an essential health benefits package and paying the health insurance tax. Business groups say ACA requirements could hike premiums for small-group coverage.

Madison, a vice president at the Crichton Group in Nashville, predicted the percentage of companies with between 150 and 300 employees that go self-insured will rise. “Six years ago, unless you had 600 employees or more, I would say you would need to wait to get bigger” before considering self-insurance, Madison said. But now, he added, “I am seeing employers down to 150 employees want to self-insure,” and he has heard anecdotal evidence of third-party administrators offering self-insurance coverage to groups as small as 25.

In addition, commercial health insurers increasingly are targeting small businesses for sales of self-funding administrative services and stop-loss policies. UnitedHealth Group is offering self-funding services to businesses as small as 10 employees, spokeswoman Cheryl Randolph said.

The potential for more small businesses to self-insure is a major concern for ACA supporters and state insurance exchange officials. They worry that having more small employers with younger, healthier workers opt out of the ACA-regulated insurance pool could mean a sicker risk pool and higher premiums for insured products. It also could reduce participation in state Small Business Health Options Program exchanges, the new marketplaces for small employers, whose success remains uncertain.

A Kaiser Family Foundation survey recently found that 15% of small employers with fewer than 200 employees currently are self-insured. In contrast, in 2011, 58.5% of workers who received coverage through an employer with 1,000 or more employees were in self-insured plans, according to the Employee Benefit Research Institute, up from 40.9% in 1998. The study also found that only 12% of companies with fewer than 50 employees were self-insured, a figure that has remained steady for years.

If a small business has a relatively healthy workforce, it makes sense for the firm to consider self-insurance since such coverage is exempt from ACA provisions such as the health insurance tax and essential health benefits requirement, which will significantly add to premium costs in 2014, said Lev Ginsburg, director of government affairs for the Business Council of New York State.

For example, CareFirst Blue Cross and Blue Shield, the largest insurer in Maryland, says its small-group rates will rise 15% next year. Higher small-group rates are particularly a concern in states such as Massachusetts that have decided to merge their individual and small-group markets in their state insurance exchange, which could drive costs for small-group coverage even higher.

Steve Wojcik, vice president of public policy at the National Business Group on Health, said insurers and employee benefits firms have been approaching some of his organization's members about moving to self-insurance, though the experience of firms and insurers aggressively marketing self-insurance is mixed.

The ACA requires companies with more than 50 full-time employees to either provide coverage or pay a penalty. The current top business concern of every company with 51 to 100 employees is how they will comply with the ACA, said Roger Hays, president and CEO of Premier Employer Services in Centennial, Colo., a suburb of Denver. Hays' firm assists small and mid-size businesses with benefits administration and other support.

“Most employers want to do the right thing,” Hays said. “However, they just don't know if they can afford to do the right thing and keep their doors open.” If an employer with 51 or more employees doesn't provide health coverage, they face a fine of $3,000 per employee, who would then get coverage through a state exchange.

“These small employers are spooked and worried and trying to preserve their benefit plans,” said Robert Laszewski, a former insurance executive and president of Health Policy and Strategy Associates, a consulting firm.

The real possibility of more small groups self-insuring worries some experts. “A drastic move to self-insurance could remove a large number of healthy people from the SHOP exchange risk pools, leading to higher premiums for those who get coverage through those exchanges,” said Linda Blumberg, a senior fellow in the Urban Institute's Health Policy Center.

A recent Urban Institute study Blumberg co-authored looking at the cost impact of more small businesses moving to self-insurance found that without laws regulating stop-loss insurance, premiums in the small-group market could increase by 24.8% for individual plans and 19.1% for families in the small-group market.

Business groups acknowledge the potential negative impact of more self-insurance on the ACA reform structure. It could drive up premiums in the insured pool, Ginsburg said. “That leaves the pool of people left to absorb the health insurance tax much smaller, and brings the amount (of the health insurance tax) per person up even more, further burdening the small businesses that purchase insurance,” he said.

Even some supporters of self-insurance question whether it's a financially smart idea for smaller companies with fewer than 250 employees to self-insure, given the tiny size of their risk pool and potential for a few high-cost cases to swamp their benefit plan.

Some states make it harder for small businesses to self-insure by regulating stop-loss insurance policies, said Hays, who noted that Colorado recently passed a law hampering the ability of businesses to self-insure.

That law makes stop-loss insurance to self-funded employers less appealing by lowering the deductible level at which stop-loss insurance takes effect, thus driving the cost of the coverage higher.

Twenty-four states regulate stop-loss insurance. Some have established required minimum coverage levels, which are designed to protect employers against costs they can't afford.

Nevertheless, commercial insurers are moving into the self-insurance business. Cigna Corp. offers self-insurance administrative services and stop-loss policies to smaller businesses, including companies with fewer than 250 employees.

Julie McCarter, vice president of product for the Cigna's Select Segment, said self-insurance gives employers more flexibility to design a plan that better suits their workforce. In addition, self-insured employers have more direct access to data on how employees use their benefits. And self-funded plans give employers a stronger financial incentive to promote employee wellness programs.

In April, Aetna unveiled a new self-funded product for companies with 100 and 500 employees known as Aetna Funding Advantage. UnitedHealth Group has dropped its minimum size for self-insurance products from 100-employee firms to 10, spokeswoman Randolph said.

One expert who didn't want to be named said commercial insurers may be emphasizing self-insurance to reduce their insured risk as they brace for millions of newly insured customers under the ACA, whose medical utilization will be hard to predict. Other observers say insurers like self-insurance because it largely operates outside the restrictions of the reform law and gives them greater leeway to seek out healthier groups.

Follow Jonathan Block on Twitter: @MHjblock