Workers expect their defined contribution plans to play a greater role in their retirement income than annuities.
By Cyril Tuohy
Call it the great stop-loss faceoff.
On one side, the Obama administration and proponents of regulation are calling for stricter rules governing stop-loss insurance, coverage purchased by self-insured employers who prefer setting aside their own funds to pay for catastrophic medical claims.
On the other side, the self-insurance lobby and some lawmakers ready to do battle to keep more regulation at bay.
Who’s right? If only it were that easy.
Maura Calsyn, director of health policy with the think tank Center for American Progress, said that regulation of the stop-loss industry is necessary to help stabilize the small-group market and protect employers and employees.
“Oversight and regulation of stop-loss insurance, which is extremely limited today, will help stabilize the small-group market and protect both employers and employees,” she said.
Without more regulation, as much as 60 percent of small business could turn to self-insurance to fund benefits, she said.
While that might suit the companies that bolt to self-insure, it would concentrate the pool of older, more costly employees working for other small companies sticking with the traditional, fully-funded insurance market.
Facing such “adverse selection,” where there are not enough younger, more cheaply insurable lives to balance out the cost of insuring older, more expensive lives, insurance carriers would hike rates by as much as 25 percent in the fully-funded small-group market, she said.
“Anecdotal evidence from various news articles suggests that this shift toward self-insurance is already occurring,” Calsyn said.
Baloney, said Michael W. Ferguson, president and chief executive officer of the Self-Insurance Institute of America (SIIA), the main lobby for self-insured employers.
Such contentions, he said, are “inaccurate,” and a recent RAND Corporation study on the subject backs up SIIA’s position. No need for “creative interpretation” of existing laws governing stop-loss insurance for the self-insured, he said.
U.S. Rep. Phil Roe, R-Tenn., chairman of the Subcommittee on Health, Employment, Labor and Pensions, weighed in: There’s no reason to tinker with existing stop-loss regulation. The self-insured marketplace is working fine.
“Self-insurance is a legitimate option for workers and employers who cannot afford this government-run scheme,” Roe said. “Perhaps this explains why some want to clamp down on the use of self-insured health care plans.”
Implementing new rules to discourage smaller employers from using stop-loss insurance would undermine self-insurance, which has worked for thousands of employers, according to the self-insurance industry.
Without more regulation, sicker employees in self-insured plans, however, could face higher out-of-pocket costs and employment discrimination due to “lasering” by the stop-loss insurance carriers, Calsyn said. Lasering allows stop-loss carriers to pinpoint an employee and charge higher premiums because of a pre-existing condition.
The Affordable Care Act outlaws denying coverage on the basis of pre-existing conditions but not in the case of stop-loss coverage, said Calsyn, who testified before a House panel last week on the affordability, flexibility and access to health plans through self-insurance.
Self-insured companies pay routine medical expenses and benefits out of their own savings accounts or out of funds set aside in a trust. They buy stop-loss coverage to protect themselves from the occasional catastrophic claim.
Many of the nation’s largest corporations self-insure. Big and small companies that self-insure believe they can do a better job of paying claims than if they bought a “fully-insured” policy from a traditional insurance carrier where rates are often higher, and pricing volatility makes it difficult to budget for claims.
Self-insurance works best when a big company can spread the risk across a large pool of thousands or tens of thousands of employees where the premium contributions quickly blossom into the millions of dollars.
As many as 61 percent of insured workers in private employer plans are covered through self-insurance arrangements, according to SIIA, citing a 2013 Kaiser Employer Health Benefits Survey.
The laws of large numbers, however, don’t work as well with smaller employers as there are often not enough employees over which to spread the medical risk. Even with enough employees, small and midsize businesses lack the analytics and the third-party administrator support to make self-insurance viable or worthwhile.
As many as 16 percent of small employers with 3 to 199 workers are self-insured, up from 15 percent In 2012, according to the Kaiser Employer Health Benefits Survey.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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