Regulatory Debate Erupts Over Small Employers Dodging Employee Health Benefits

A debate is brewing over health insurance coverage for small businesses, with consumer advocates contending that very small employers will try to self insure and use medical stop-loss insurance with low deductibles to avoid compliance with the Patient Protection and Affordable Care Act.

In employer-sponsored health benefits, fully insured and self-insured group plans are governed by the federal Employee Retirement Income Security Act of 1974, said Carmen Balber, director of the Washington D.C. office of Consumer Watchdog. The main difference is self-insured plans don't have to comply with some of the health reform law's key consumer protection provisions, including the requirements for minimum essential health benefits, guaranteed issue and community rating, the medical loss ratio regulation and premium oversight, Balber said.

Traditionally, many large employers and huge corporations self-insure their employee's health benefits, but self-insurance for small businesses "is almost unheard of," Balber said, noting very small businesses are considering self-insuring to avoid the ACA provisions.

Individual lifetime medical maximums were removed under the reform law. The law removes annual limits in 2014.

A big concern is that small businesses will be using the exchanges that come online in 2014, and self-insurance is being encouraged for businesses with the healthiest employees, Balber said, noting it's a way to "cherry pick the healthiest in the risk pool." If small employers use stop-loss as a way to avoid the ACA's consumer protections, any employer might choose to self insure when its employees are healthy, then shift to the exchange if employees become sicker, she said.

Generally, employers must have specific/individual stop loss, designed for the claims of one covered individual in a group, said Ryan Siemers, a principal at Aegis Risk, a consulting firm and broker specializing in stop loss. The National Association of Insurance Commissioners is reviewing minimum deductible levels, and many stop-loss insurers have deductibles on specific-individual policies as low as $50,000 or even , Siemers said. Those in favor of self-insurance are concerned that a requirement of a deductible of $100,000, for example, might discourage some small employers from self-insuring, he said.

In a letter to Kansas Insurance Commissioner Sandy Praeger, chairwoman of the NAIC's Health and Managed Care Committee, and Christina Goe, chairwoman of the NAIC's ERISA Working Group, several consumer groups, including Consumer Watchdog, are urging the NAIC to protect the state regulation of health insurance by raising the attachment points on stop-loss insurance. Timothy Jost, a law professor at Washington and Lee University School of Law, helped write the letter.

New York and Oregon prohibit the sale of stop-loss insurance to groups with 50 or fewer workers, and Delaware does the same for firms less than 15, they write. "But another approach is to set minimum attachment points to ensure that employers who purchase stop-loss coverage are genuinely willing to take on the risk of being self-insured," the letter says. "This was the goal of the original NAIC Stop Loss Insurance Model Act, and is the reason why the attachment points in the current act must be updated."

Employers migrating now to self-insured status are non-grandfathered, and almost every consumer protection provision in the ACA is imposed on non-grandfathered plans so they're not getting themselves out these provisions, as some critics contend, said Mike Ferguson, chief operating officer of the Self- Insurance Institute of America. "The market is working fine the way it is."

Siemers also said benefit brokers may now be inclined to move employers to self-funding because stop loss is exempt from the ACA, including the medical loss ratio regulations and so could receive commissions on stop loss. They might be able to do a combination of administrative-services-only fees and stop-loss commission to continue their historical commission levels at a level that the medical loss ratio regulations no longer permit, Siemers said.

Among the top writers of stop loss are HCC Life Insurance Co., part of HCC Insurance Holdings; Symetra Financial, Cigna Corp.; Highmark; Sun Life Financial and Independence Holding Co., said Sally Rosen, managing senior financial analyst at A.M. Best Co. HCC is "the clear leader" in risk premium while Cigna is very large in the administration business, she said. The key to profitability is pricing appropriately, Rosen said. "Assuring that the deductible is appropriate for the size of the group, especially with the increased interest by small businesses, is a key factor."

Today, about 65 million people have health coverage through self-insured plans sponsored by their employers. Ferguson said self insurance is a way for small businesses to have affordable coverage for themselves and their employees. Stop-loss is for catastrophic claims.

Ferguson called an employer with a young, healthy workforce going the self-insured route and leaving an old, unhealthy workforce to the exchanges a "misconception." There's no need for new regulatory action at the federal or state levels, Ferguson said, noting state insurance regulators can't directly regulate self-insured ERISA plans.

The NAIC's ERISA working group reviewed concerns about stop-loss at the NAIC's recent summer meeting Atlanta. Information was gathered but the group did not act to amend the NAIC's Stop-Loss Insurance Model Act. The U.S. Departments of Labor and Health and Human Services had also issued requests for comments on the matter to interested parties.

Others in stop-loss include managing general underwriters, such as MRM, owned by Symetra, which works directly with many Blue Cross Blue Shield plans to be their stop-loss shop, Siemers said. MRM writes coverage on a Blue plan's own paper source or a paper source that MRM suggests, such as Evergreen Re or Zurich, he said.

"We strongly support the NAIC adopting guidelines to assist the states in taking this step to ensure that insurers that are selling medical insurance to employers who are in fact not bearing substantial risk themselves comply with the ACA and with state law," the letter says. The guidelines were recommended by the NAIC Self-Insurance Subgroup, the Health Care Reform Actuarial Working Group, and the Health Actuarial Task Force based on a Milliman study the NAIC commissioned.

(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])