OP-ED | The Charts That Scare Health Insurance Watchdogs

Self-insured small group plans sound innocuous but they're not – and they are growing quickly, according to new numbers from the Connecticut Insurance Department. The plans save money for some small businesses, but they have serious risks. State policymakers are trying to create a safer option, within the bounds of federal rules. It's kind of complicated but stay with me. I'll walk you through it; there will be no numbers.

Connecticut's small businesses are struggling. Inflation, COVID, and labor shortages are serious challenges, but rising healthcare costs are crushing them. Premiums are scheduled to rise 7.4% on average next year. Small business owners who want to do the right thing, and offer health benefits to their workers, are desperate for affordable options. Self-funded small business health plans offer relief for some companies if their workers are generally healthy. But groups that include older workers, people with disabilities, and communities of color could be left out.

In traditional fully-insured plans, insurers get regular premium payments from employers and workers. If medical costs exceed the premiums paid, insurers must cover the excess, and can't raise the group's premiums next year to make up the difference. But in self-funded plans, employers pay all their workers' medical bills directly; insurance companies just administer the plan for the employer. Insurance companies collect premiums from employees to cover the expected medical costs of the small business's workers. If premiums don't cover the bills, the business is on the hook. In a big company with a lot of workers, one cancer diagnosis or serious accident wouldn't have a big impact on the entire company's healthcare costs. But medical bills for just one person could bankrupt a small company. Until recently, small business owners would have been crazy to take on that risk, and very few did.

Under federal law, self-funded plans operate outside the protections included in the Affordable Care Act (ACA) or state laws and regulations. Self-funded plans can refuse to cover pre-existing conditions and don't have to cover essential medical services.

However, in 2019, insurers started selling cheaper "level-funded" plans to small businesses, in Connecticut and across the US. These are self-funded plans that keep premiums stable across the year by building in stop-loss insurance (also called reinsurance) to cover high medical bills over a threshold. This helps keep costs stable for the years when nothing bad happens. But if a high-cost medical issue happens, the next year rates go up sharply.

Policymakers are concerned that level-funded plans will siphon off healthier groups from the rest of the small group market. This could leave out small companies that hire workers with more healthcare needs, including people who are older, disabled, or from communities of color, raising costs in the fully-insured market that they rely on.

The other problem with level-funded plans is that they just shift financial risk around. They do nothing to address the drivers of rising healthcare costs for all plans – high prices for drugs and services at huge monopoly health systems.

Despite the risks, Connecticut's small businesses have been signing up for these level-funded plans in droves, growing from 3% to 24.4% of small group enrollment in just three years. Experts expect that growth to continue, potentially threatening the integrity of Connecticut's overall small-group health plan market.

Some legislators and business groups are working to find a better option. Legislation to create a safer level-funded plan was debated last year. Initial concerns about the new Association Health Plans were being negotiated between legislators, consumer, and business advocates. The new plans would offer small businesses an option that includes the flexibility and cost benefits of self-funding but gives members some ACA safeguards that make coverage meaningful. Added protections included requiring the plans to cover all essential benefits in state and federal law, limit how much their rates can vary, and bring them under state regulation.

The bill died last year under opposition by patient groups who were concerned that expensive care they need would not be covered in these plans, or by AccessHealthCT, Connecticut's health insurance exchange that only offers the more costly fully-funded plans. But as more small employers flock into level-funded plans, it's likely the legislation will return next session.

Association Health Plans aren't perfect, but they are better than the Wild West of current level-funded plans. And in the meantime, we all need to get serious about reducing the high prices that are jacking up healthcare costs for small businesses and everyone else.