Will Many of the Smallest Employers Circumvent the Affordable Care Act by Using Self-Insurance?

Not surprisingly, only about 10% of firms with fewer than 200 workers take advantage of self-insurance––and almost no very small groups (fewer than 50 workers) use the product. It just isn't worth it for these small employer groups to take the risk that they will either have too many claims or very big claims from their workers––that is what insurance companies are for.

Already, 96% of workers in firms with more than 5,000 employees are in self-insured health plans. For firms between 1,000 and 5,000 workers, 79% are in self-insured plans. For employers with 200 to 1,000 workers, the self-insured rate is 50%.

But with the bulk of the implementation of the Affordable Care Act (ACA) to begin in 2014, that may be about to change.
Under the ACA, self-insured plans are exempt from the new excise tax on health insurance premiums, community rating on premiums (including the 3:1 age bands), and mandates under the upcoming essential health benefit rules.

Self-insured plans are also exempt from the greater regulation insurers face regarding minimum loss ratios and annual rate increase review.

The ability of small employers to in effect opt-out of the ACA's stiffest insurance reform requirements by moving to self-insurance is on the cusp of becoming a market trend. Some insurers are offering to take over the liability for individual health insurance claims (the "attachment point") as low as $10,000 in the very small employer health insurance market––the employer is on the hook for claim costs below that point.

Regulators are worried about self-selection in the market––the healthiest small groups going self-insured and refusing to be part of the ACA's insurance exchange pool leaving only the sickest small groups to fall under the ACA.

Currently, the National Association of Insurance Commissioners (NAIC) model law on self-insurance, followed by many states, prohibits employers from using an attachment point below $20,000. States worried that there will be a mass exodus from the small insured market are looking at raising these attachment points––the California insurance department is pursuing a law to raise the attachment point to no less than $95,000.

While many Democrat-led states could well move to blunt this market move by increasing the attachment point as California is trying to do, it is likely that as many Republican state legislators will be all too eager to let employers opt-out of "Obamacare."

The regulation of insurance––and self-insurance "stop-loss" policies and their attachment points––is still the domain of the states. The ACA didn't change that for the regulation of insurance companies providing stop-loss insurance to self-insured plans.

Insurance brokers, Third Party Administrators (TPAs), and some insurers, pushing self-insurance into the traditionally small group insurance market could be about to do a land-office business, presuming the ACA is implemented in 2014.

Many insurance regulators are also worried that this could muck up the health insurance risk pool in states that allow it. They worry this could lead to those small groups moving to the self-insured market getting a cost break at the expense of those remaining fully insured in the regulated market.