California Restricts Stop Loss Insurance – Tips Scale Against Self Funding


Legislation designed to make it more difficult for smaller employers to self-insure by restricting their ability to obtain stop-loss insurance with very low attachment points was signed into law on Oct. 1 by California Gov. Jerry Brown.

S.B. 161, which takes effect Jan. 1, 2014, will prohibit stop-loss insurers in California from issuing policies with specific deductibles below $35,000 for self-funded employer plans. After Jan. 1, 2016, the law increases the minimum specific attachment point to $40,000.

Also under the law, starting Jan. 1, aggregate attachment points cannot be less than $5,000 times the total number of group members, 120 percent of expected claims, or $35,000 ($40,000 after Jan. 1, 2016).

Note: The bill as introduced in May 2013 had a minimum specific attachment point of $65,000. During debate, bill sponsor Sen. Ed Hernandez (D) agreed to lower that minimum to $35,000.

Starting April 1, 2014, and each April 1 thereafter, stop-loss insurers will have to report to the California Department of Insurance the number of small employer stop-loss polices they had issued that were in effect as of Dec. 31 of the previous year.

S.B. 161 brings stop-loss policies in line with health care reform rules banning pre-existing condition exclusions, rescissions and annual and lifetime limits for health coverage.

It also prohibits stop-loss insurers from denying coverage for individuals who were very sick and costly the year before, a practice called “lasering.” It prohibits them from excluding any employee or dependent based on actual or expected health status-related factors.

It prohibits stop-loss insurers from refusing to reissue policies to employers. Instead it requires them to renew all stop-loss insurance policies (if asked by the employer), except: (1) in cases of non-payment of premiums or intentional misrepresentation by the self-funded plan; (2) if the insurer ceases to issue stop-loss policies; or (3) if the insurer is determined to be “financially impaired” by the state insurance commissioner.

In so doing, S.B. 161 tips the scale against self-funding by making companies assume more risk of paying members’ health expenses, and potentially dissuading them from deciding to self-insure in the first place, the Self-Insurance Institute of America said.

Governor Says Bill Supports of Reform

The Governor’s office in Sacramento connected the passage of SB 161 to its support of the health care reform law. Earlier insurance mandates, such as no rescissions and no annual limits, raised the cost of coverage, but self-insurance is a way that employers can skirt compliance with federal and reform mandates, to the peril of consumers, reform proponents have argued.

S.B. 161 builds on earlier health care reform implementation efforts, including building a health benefit exchange, the governor’s office said.

See Section 600 of the Employer’s Guide to Self-Insuring Health Benefits for more information on stop-loss insurance.