Self-Funded Health Insurance Plans Expected to Grow in Number

Following Court Ruling, Attention Turns to Self-Funded Benefits
Health care law may affect the ability of smaller employers to self-fund their benefits.
By now, virtually everyone is aware the U.S. Supreme Court upheld the Patient Protection and Affordable Care Act—with the exception of the Medicaid expansion provisions—in its ruling in National Federation of Independent Business v. Sebelius.In the majority opinion, Chief Justice John Roberts noted the Court’s role in the decision: “Members of this Court are vested with the authority to interpret the law; we possess neither the expertise nor the prerogative to make policy judgments. Those decisions are entrusted to our Nation’s elected leaders, who can be thrown out of office if the people disagree with them. It is not our job to protect the people from the consequences of their political choices.”  And while it is true voters have a certain amount of control in a democratic republic, the reality is that, given the complexity of the law, it’s not always immediately apparent what it actually contains.  Then-House Speaker Nancy Pelosi said at the 2010 Legislative Conference for the National Association of Counties, “But we have to pass the bill so that you can find out what is in it, away from the fog of controversy.”

Now, independent agents may be learning of another wrinkle in the law that has significant implications for their clients relating to “self-funding” of health insurance benefits.

For years, many midsize and larger companies—including nonprofits and government organizations—have opted to self-fund their health insurance benefits to provide greater oversight, control and better service, and to control costs. Employers that use this approach are passionate about it because it can help alleviate significant cost increases and enable employees to understand the value of their health benefits and become better consumers of health care. 

So how does PPACA affect self-funding?  

When PPACA was being debated, President Obama said at a New Jersey rally on July 16, 2009: “Let me be exactly clear about what health care reform means to you. First of all, if you’ve got health insurance, you like your doctors, you like your plan, you can keep your doctor, you can keep your plan. Nobody is talking about taking that away from you.”

Many agents have clients that utilize self-funding and rely on the use of “stop-loss” insurance to protect them from catastrophic claims. Agents receive commissions on the sale of stop-loss coverage and are appropriately compensated for the expertise and assistance provided to plans that self-insure. Since the controversial medical loss ratio requirements of the PPACA do not apply to self-insured plans or stop-loss insurance, they present an avenue for agents to maintain a fair level of compensation for their services and advocacy. 

Meanwhile, Section 1254 of PPACA requires the Department of Health and Human Services to provide a report to Congress that determines the extent to which new insurance market reforms are likely to cause adverse selection in the large group market or encourage small and midsize employers to self-insure.

In May, the Obama Administration also issued a request for information concerning stop-loss insurance and signaled its apparent intention to take some action regarding this marketplace. The preface to the request may have offered some insight into the views of the Administration when it suggested that small employers who self-insure and purchase stop-loss policies could “worsen the risk pool and increase premiums in the fully insured small group market.” 

At the same time when federal officials are studying the potential future of self-insurance in the health arena, state policymakers are reviewing the criteria and requirements that govern the issuance of stop-loss insurance policies. The National Association of Insurance Commissioners adopted a stop-loss model law in 1995, and the organization of state regulators recently initiated a review of those longstanding recommendations. 

The recommended minimum attachment points—which are the dollar thresholds that determine when the stop-loss insurer bears the risk—have not been increased since that time, and most observers expect the NAIC to approve an increase in these amounts and perhaps adopt other revisions to the draft. The level at which the NAIC and individual states set these attachment points are critical to the future of the self-insurance market because excessive attachment points will endanger the viability of this vital insurance option. 

Some observers are calling for more stringent oversight of self-funding and want to restrict the ability of the industry to provide stop-loss coverage at both the state and federal levels. 

In the abstract for a soon-to-be-released paper, Tim Jost, NAIC consumer representative and Washington and Lee University Law School professor, and Mark Hall, Wake Forest University Law School professor, said: “Aspects of the reform law could motivate small businesses to self-insure, rather than participate in state-regulated markets either inside or outside the new health insurance exchanges. If younger or healthier groups self-insure, premiums for insured plans will rise, perhaps to an extent that could seriously impair the regulated market.”

“State or federal lawmakers can influence small businesses to participate in the regulated market by making it more difficult or costly to obtain stop-loss coverage, which self-funded employers rely on to protect their businesses from catastrophic medical costs incurred by one or more insured workers,” they added. “Regulators can limit the comprehensiveness of stop-loss coverage, ban stop-loss coverage outright, or regulate it as they do primary coverage. Because the issues are national in scope, and because uncertainty over ERISA preemption complicates state initiative, the federal government should take the lead in determining the proper confines of self-funding in the small-group employer market.”

The bottom line for independent insurance agents is that they should remain alert to developments pertaining to the regulation of self-funded plans, particularly for smaller plans. As HHS gathers data for their report and state officials increasingly focus on stop-loss insurance, the Big “I” will continue to work with the NAIC and at the federal level to ensure that a balanced perspective be used in evaluating successful avenues to containing health care costs like self-funding. 

Dave Evans ( is a certified financial planner and an IA l-h contributing editor.