Potential Risk Is Too High For Small Firms Wanting To Self-Insure


While the Patient Protection and Affordable Care Act (ACA) was created to increase access to health care, it also provides several incentives for small firms to self-insure their health plans, according to a recent article from the nonprofit public policy organization Brookings Institution. However, Robert C. Pozen, nonresident senior fellow of economic studies at the Brookings Institution, concludes that the potential risks of self-insuring will still be too high for many small health plans.

In the article, Will More Small Firms Self Fund Their Healthcare Plans?, Pozen noted that traditionally only 8 percent to 16 percent of small firms (those with less than 100 employees) have self-funded their health insurance plans. However, the ACA created new regulatory incentives for small firms to self-fund their plans, such as:

• Self-funded plans are not subject to the essential health benefit requirements of the ACA, which stipulate minimum coverage for health care plans sold by insurers to small firms with less than 50 full-time employees in 2014, to be extended to small firms with 50 to 100 full-time employees in 2016. Such minimum coverage includes maternity care, mental health and preventative services.

• Self-funded plans are not subject to the community rating requirements that ACA applies now to small firms with less than 50 full-time employees and in 2016 to small firms with 50 to 100 full-time employees. These requirements severely restrict how much insurers may vary premiums based on health factors like age and smoking status.

• Self-funded plans are not subject to medical loss ratio requirements, which apply to traditional policies issued by health care insurers. These requirements mandate that at least 80 percent of premiums received by the insurer be spent on health care activities, as distinct from administrative functions.

• Self-funded plans escape the health insurance tax mandated by the ACA on most health care premiums paid to traditional insurers. In 2014, this federal tax amounted to 2 percent of such premiums.

• Self-funded plans also escape the state taxes on healthcare premiums paid to third party insurers. In 2014, these state taxes amounted to roughly 1.75 percent of such premiums.

Risky business. According to Pozen, “Despite these regulatory benefits, self-funding of health care plans is much riskier for small firms than large companies. Small firms do not have the diversified employee base or financial resources of large companies to absorb substantial overruns in health care expenses.” While small firms would likely purchase stop-loss insurance to help absorb some of this risk, Pozen believes that most stop-loss insurers would likely charge small firms a higher premium and deductible. In addition, stop loss insurance is not protected by the guarantee issue and renewal provisions of the ACA, which apply to traditional health care policies. Since stop loss policies are issued on an annual basis without any guaranteed renewal, an unexpected rise in the health care costs at a small firm can lead to much higher premiums the next year or outright cancellation of the stop loss policy.

For more information, visit http://www.brookings.edu/research/opinions/2014/12/09-self-fund-healthcare-pozen?rssid=health.

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