In its design, the Affordable Care Act (ACA) includes several benefits and provisions intended to assist small businesses with providing health care coverage. Still, a recent survey of small business owners found that a majority believe the ACA is bad for their business and more than 80 percent want more government help staying compliant with the law’s regulatory framework. With such concerns still present among many in the small business community, policy experts have predicted that some may begin to self-fund their health coverage in order to avoid the ACA.
With the ongoing discussion of self-funding in the small group market, including talk of developing stop-loss policies specifically designed to market to small employers, a working group of the National Association of Insurance Commissioners (NAIC) released a white paper draft, titled “Stop Loss Insurance, Self-Funding and the ACA,” which explores the various regulatory issues that state insurance departments must be aware of when regulating stop-loss insurance policies. Specifically, the NAIC sought to provide state officials with options for regulating stop-loss coverage in situations in which mere disclosure of the policy’s risks is likely to be insufficient.
For example, the NAIC encouraged the adoption of minimum standards that could protect employers with regard to the issue of “lasering.” Lasering is defined as the practice of assigning a different attachment point or deductible, or denying coverage altogether, for an employee or dependent based on the health status of that individual. Lasering allows stop-loss insurers to set higher attachment points for employees with costly pre-existing conditions, which then transfers the liability for these employees’ costs back to the employer and employee. Although the ACA explicitly prevents this discriminatory practice, this protection does not apply to self-funded plans.
Recent State Action Attempts to Protect Small Business Owners from Risks of Self-Funding
One state – Connecticut – has issued guidance to insurers, addressing the issues that were outlined in the NAIC white paper. The guidance specifically adopts the paper’s suggested approach to lasering. Under the provisions recommended by the NAIC, and adopted in Connecticut, insurers are allowed to use lasers when underwriting stop-loss plans but are strictly prohibited from imposing an attachment point for an enrollee that is greater than three times the attachment point for the overall policy. The guidance also prohibits lasers from being added or changed after the effective date of the policy and requires insurers to fully disclose the increased risk, when a laser is in fact used. This means that if any lasers are used in the policy, the application must include a statement that the financial risk was fully explained to the policy holder and that the policy holder understands the risk associated with this product. Maryland also addresses the NAIC white paper in its “Interim Report on the Use of Medical Stop-Loss Insurance in Self-Funded Employer Health Plans in Maryland,” by identifying the NAIC’s suggested minimum policy standards to regulate lasering and highlights recent legislation that prohibits the use of lasers in the state.
What is Self-Funding and Stop-Loss, and What Are Risks and Benefits for Employers?
When offering health coverage for their employees, businesses typically choose among two options: (1) a “fully insured” plan; or (2) “self- insurance.” A fully insured plan acts as traditional insurance, in which the employer purchases health insurance coverage from an insurer who takes on the financial risk of paying the claims for covered benefits. Under the self-insured plan option, the employer takes on the financial risk of paying claims for covered benefits. The employer may additionally purchase a stop-loss insurance plan, which protects the employer against large, unpredictable claims above a specified level during a given year. This level, known as the aggregate attachment point, is the dollar amount that triggers the end of the employer’s liability, and where the stop-loss insurer begins to pay for claims incurred by the group covered.
Although self-funding has traditionally been more prevalent among large employers, small employers have become more attracted to it because such plans are exempt from many regulatory requirements, including some of the new rules under the ACA. For example, self-funded plans are not subject to the ACA’s essential health benefit requirements and premium rating rules (including the law’s prohibition on health status and gender rating), and are not required to pay the annual fee that insurers must pay on fully insured products. However, even though the ACA creates new regulatory incentives for small firms to self-fund their health care plans, there are notable potential downsides to this method of insuring, such as taking on greater risk. In the event that the group’s health status declines, the stop-loss insurer may drastically raise premiums, or even refuse to renew coverage, as the change in health status makes the group more expensive to cover. Employees of self-funded plans are also at risk of receiving fewer benefits because many consumer protections do not apply to self-funded plans.
Given the increasing popularity and potential benefits of self-funded plans for small employers, it is important both for businesses to understand the risks of the self-insured market and for states to make sure these policies treat employers and their workers fairly. We’ll be watching to see if other states follow Connecticut or Maryland’s lead.