When Policy and Politics Conflict: Challenges to State-level Market Stabilization Efforts

My guess is that if you ask most Delaware policymakers what small business owners deserve when they’re buying health insurance, most would say something like this: They deserve affordable, stable premiums for decent benefits that allow them to compete with larger companies for the best and brightest talent. Policymakers might also say that employers deserve a choice of health plans, in a market where insurance companies compete to provide them with high-value products. I’d also guess there would be remarkable unanimity among Delaware’s leadership about these goals, regardless of political persuasion.

Yet in the last month, Delaware has enacted two policies with diametrically different effects on the state’s small business insurance market. While one policy will help stabilize and strengthen the market for small business health insurance, the other will do the opposite.

Insurance 101: What leads to a strong, stable health insurance market?

As any insurance wonk will tell you, two key elements of a stable insurance market are size and balance. The bigger the risk pool, the more likely it is it will have a good balance between healthy and sick enrollees, and the easier it is for insurers to set accurate prices for the risk they take on. This in turn helps keep premiums more affordable and stable. On the other hand, the more a risk pool is divided into segments, particularly if those segments are divided between the more-healthy and the less-healthy, the more likely you’ll get something called adverse selection. Adverse selection occurs when one market segment attracts a sicker pool of enrollees, leading to higher prices, the flight of healthier enrollees to other market segments, fewer insurers willing to participate, and in extreme cases, market collapse.

Two conflicting policies: Delaware’s new association health plan and employer self-funding rules

In August, Delaware’s department of insurance (DOI) issued an emergency regulation designed to protect its small business market from adverse selection. Specifically, the policy responds to the Trump administration’s new rules for association health plans, (AHPs) which allow them to bypass Affordable Care Act (ACA) consumer protections. The Delaware DOI has put purveyors of AHPs on notice that they’ll have to meet tough state-level requirements and standards if they want to sell to Delaware employers, including covering the ACA’s essential health benefits, submitting all marketing and advertising to the DOI for pre-approval, and maintaining hefty cash reserves. As we’ve documented on CHIRblog and elsewhere, if left unregulated, AHPs will siphon away healthy enrollees from the small business market. The Delaware DOI’s regulation will help ensure that AHPs operate on a more level playing field, which is critical to keeping premium rates affordable and stable for all small businesses, not just those with predominantly young and healthy employees.

It was therefore surprising to see, only a few weeks later, Delaware’s Governor signing legislation that would have the exact opposite effect. House bill 406 makes it easier for small employer groups with as few as 5 employees to self-fund their health plans. By self-funding, the employer plan is able to bypass federal and state consumer protections, benefit mandates and rating standards that apply to the small business market. Many large employers self-fund their plans, but it has been relatively rare among small employers, mainly because insurers historically recognized that small employers were ill suited to the considerable, and unpredictable, financial and legal risks that accompany self-funding.

Yet in the wake of the ACA, insurance companies have ramped up the marketing of new self-funding options to ever-smaller employer groups that have relatively young and healthy workers. Typically, these arrangements combine a self-funded plan, in which the employer assumes the risk of paying claims, with a stop-loss policy that protects the employer from unexpectedly high claims costs. However, although these arrangements can be affordable and attractive to small employers with young and healthy employees, they carry significant risk. If someone in the group gets sick, the employer can face significant rate hikes, unexpected claims liability, and even lose eligibility for the coverage. For the small employer insurance market, as self-funded plans gain traction, they result in increasing segmentation between high- and low-risk groups, leading to the adverse selection discussed above.

What’s causing the whiplash in Delaware?

Why would a state adopt two such conflicting policies? The impact of the DOI effort to keep the small-group market stable will blunted by the new law to encourage more self-funding among the very smallest of small employers. One explanation could be that in this case, politics trumped good policy. Insurers make more money when they can cherry pick healthy individuals and groups; these special interests often mount well-funded and sophisticated lobbying efforts to convince legislators to make it easier for them to do so.

In the wake of the Trump administration’s efforts to roll back the ACA’s insurance market rules that protect people with pre-existing health conditions, all eyes have been on the states to step into the breach and maintain individuals’ and small businesses’ access to affordable, stable premiums and high quality health insurance. However, state officials wishing to enact such policies can expect headwinds from those companies who profit by segregating the healthy from the sick. It remains to be seen how many states will be able to successfully overcome them.

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