Factors Affecting Self-Funding by Small Employers: Views from the Market

The Affordable Care Act (ACA) will significantly change the regulatory standards that determine the accessibility, affordability, and adequacy of private health insurance coverage in the small group market. While these changes are intended to improve market conditions and the generosity of coverage for small employers, they could increase the cost of insurance for some small employers. As we have discussed on this blog, policy experts have speculated that such cost increases—and some of the new regulatory standards—may encourage small employers to establish “self-funded” health plans and leave the fully insured market, thus avoiding a number of the ACA’s requirements, such as modified community rating, coverage of essential health benefits, limits on cost sharing, and the health insurer fee. Because self-funding may be particularly attractive to younger and healthier groups, a large increase in self-funding could cause adverse selection against the fully insured small group market, including but not limited to, the small business health options program (SHOP) exchanges.

In our new report, Factors Affecting Self-Funding by Small Employers: Views from the Market, we assess attitudes towards and trends in self-funding for smaller employers through interviews with stakeholders in the 10 states participating in the Robert Wood Johnson Foundation’s monitoring and tracking project (Alabama, Colorado, Maryland, Michigan, Minnesota, New Mexico, New York, Oregon, Rhode Island, and Virginia). We found that most informants felt that self-funding, even with stop-loss policies—which protect employers from unexpectedly high health care costs—could expose small businesses to considerable, and unpredictable, financial and legal risks. Most informants also did not believe that insurers and brokers are currently selling stop-loss insurance to small groups, beyond a few niche sellers, and none thought that small employers are self-funding in any significant numbers. However, we found that insurance regulators and policymakers are hindered by a lack of data, with no state able to report the actual number of small employers covered under stop-loss policies or the terms under which those policies are being marketed.

Looking ahead, informants believed that health insurers would reconsider selling stop-loss policies to small groups if their competitors start to do so, yet most were hesitant to predict how much or how fast such practices might increase under the new health reform law—instead commenting on the range of variables that will influence small group market dynamics in 2014. Many informants agreed, however, that groups with between 51 and 100 employees are likely to self-fund in greater numbers than groups with 50 or fewer employees, particularly when they become subject to the small group market reform rules in 2016

Given the uncertain future of the small group market and number of other pressing health insurance reform responsibilities facing state legislatures, departments of insurance, and health insurance exchanges, we also found that prohibiting or otherwise expanding regulation of the sale of stop-loss insurance to small employers is a low priority in the near future. Instead, many informants acknowledged that states would be well served to improve monitoring of the stop-loss market and trends in self-funding by small groups, so they can identify if changes in the marketplace are occurring and respond appropriately.

The research was funded by the Robert Wood Johnson Foundation (RWJF) and published by the Urban Institute as part of a comprehensive monitoring and tracking project to examine the implementation and effects of the Patient Protection and Affordable Care Act of 2010. This report is one of a series of papers focusing on particular implementation issues in these case study states. In addition, state-specific reports on case study states can be found at www.rwjf.org and www.healthpolicycenter.org. The report was written by faculty and staff at the Georgetown University Health Policy Institute’s Center on Health Insurance Reforms (CHIR). CHIR is composed of a team of nationally recognized experts on private health insurance and health reform. For updates on these and other health insurance reform issues, stay tuned to CHIRblog!

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The opinions expressed here are solely those of the individual blog post authors and do not represent the views of Georgetown University, the Center on Health Insurance Reforms, any organization that the author is affiliated with, or the opinions of any other author who publishes on this blog.