How Employers Might Use Self-insurance To Sidestep Affordable Care Act Rules


By Jay Hancock

Self-insurance has been called an Obamacare loophole. That’s because the arrangement – in which the employer pays medical bills instead of an insurance company – is immune to taxes, benefit requirements, profit limits and other rules set by the Affordable Care Act.

For small businesses with young, healthy workers, it’s also a way to offer coverage while avoiding premiums that build in costs for older, sicker people in the ACA’s insurance marketplaces – the rate shockpredicted by some.


If self-insuring companies skim too many young folks out of the small-business exchanges, insurance company costs and losses could soar, insurers could exit and the exchanges could break down, some believe.


See stories from Kaiser Health News, The New York Times and The Wall Street Journal.


Self-insurance looks like regular coverage – only without the ACA rules


How can tiny, self-insuring companies, with say only 30 or 80 workers, bear the risk of unexpectedly large claims? They buy reinsurance, also known as stop-loss coverage. Stop-loss kicks in when somebody’s bills top, say, $20,000 or $50,000. Say you’re a self-covered small business with 70 employees. Your normal annual medical bill is $400,000 (no family coverage), and you hire the local Blues or somebody else to handle the claims. If a worker gets cancer and the bills soar into six figures, you pay only the first $20,000. The stop-loss plan handles the rest.


But as brokers promote self-coverage as an Obamacare alternative, stop-loss triggers are getting lower and lower along with the size of self-insuring employers. One reason the industry may be keen: ACA limits on health insurance profits don’t apply to reinsurance. Companies with as few as 10 or 20 workers are reportedly self-insuring, protecting themselves with stop-loss that kicks in at levels as low as a few thousand dollars.


To the employer, the employees and the world it looks like regular health insurance without the ACA rules. (The employer mandate was delayed for a year, but not all regulations affecting insurance were put off.) Small businesses see it as a way to offer coverage and avoid rate shock. ACA fans see it as gaming the system.


Self-insurance is a local story


As with everything else about the ACA, officials see self-insurance differently depending on politics. Insurance commissioners in red states often seem to believe it’s a good option for small companies. Officials in blue states worry it will cause bad adverse selection in the exchanges.


In any event, ACA backers see self-insurance as a threat to the small-business marketplaces, or SHOP exchanges, that are scheduled to open in every state Oct. 1.


To see if small employers are turning to self-coverage, call around to brokers and claims administrators (known as third-party administrators, or TPAs). They can also put you in touch with local self-insured employers. See what the state insurance department thinks.


ACA proponents are especially concerned about self-insurance by employers with fewer than 50 workers.  Companies of this size aren’t required to offer coverage under the ACA, but many are expected to shop on the small-business exchanges.


Officials are considering limiting self-insurance, but it’s early


Large employers – those with 500 or more workers – have self-insured for decades. They’ll continue to do so. But this year legislatures in California, Rhode Island, Minnesota and elsewhere considered limiting self-insurance for very small firms by raising the stop-loss triggers, known as “attachment points.” I don’t believe any of them passed.


California’s proposal to allow stop-loss triggers no lower than $95,000 or so would effectively end small companies’ ability to self-insure. The Self Insurance Institute of America is a good source on what states are doing.


The National Association of Insurance Commissioners has considered raising attachment points in their model state law, but it hasn’t gone anywhere. The Department of Health & Human Services and the Department of Labor put out a request for information last year on stop loss and got lots of feedback. Some thought that was a prelude to federal regulation, but the ERISA statute and related case law would seem to bar the feds from messing with self-insurance.


Observers don’t expect states to get serious about raising attachment points unless small-business exchanges run into trouble. But by then, ACA backers warn, it could be too late, as exchanges will have already fallen into a cycle of soaring costs and decreasing affordability. Nobody systematically tracks how many small businesses are self-covered. But if anecdotes and news reports are an indication, aggressive marketing of self-insurance is another challenge to the health act.




Jay Hancock is a staff writer at Kaiser Health News. Before joining KHN in 2012, he wrote a column on business and finance for The Baltimore Sun. Previously he covered the State Department and the economics beat for The Sun and health care for The Virginian-Pilot of Norfolk and the Daily Press of Newport News.