Standing up for the Little Guy

Employers who self-fund employee benefits are legion, and the further legions that now appear ready to join them represent a major opportunity for benefits brokers.

Sorta. Maybe. Well, could be.

As employers prepare for the onslaught of federal healthcare reform rules, a new attack is coming from an unexpected foe: the states. The challenge for 2014 is how to keep the self-insured option open amid a federal threat and state regulatory action that would restrict access to medical stop-loss coverage—a key tool in self-funding.

Small and midsize employers who want to self-insure are facing battles on two fronts: the Affordable Care Act and states such as California. Even though employers have strong allies in their brokers, The Council and other trade associations, it’s not clear which side will win. And the stakes are massive.

Although precise numbers are hard to come by, it’s widely believed that tens of millions of Americans have healthcare coverage through self-insured plans.

Limitations on self-insurance, even for a small segment of employers, would translate into gargantuan shifts for workers and their dependents.

The 1974 Employee Retirement Income Security Act (ERISA) pre-empts states from regulating benefit plans. Self-insured health plans are therefore exempt from state action—or at least they are supposed to be.

But several states, led by California, are trying a flanking maneuver. They aren’t trying to restrict self-funded plans directly. Instead, they’re targeting a key tool that employers rely on in self-funding benefits: medical stop-loss coverage. The states’ focus is on the small-group market of up to 50 lives, where stop-loss use is highest. A Kaiser survey in 2012 found that 60% of workers in self-funded health plans have stop-loss coverage, and that percentage is even higher among small self-funded plans.

Why Now?

“Self-insurance used to be a relatively sleepy subject,” says Mike Ferguson, president and CEO of the Self-Insurance Institute of America (SIIA). Before the Affordable Care Act, Ferguson says, “smaller and midsize employers had been stomaching rate hikes from carriers for years, but that reached a tipping point. There is more uncertainty in the market now due to the ACA, and employers have been gravitating to the self-insurance marketplace.

“Some policymakers and left-leaning advocacy groups see self-insurance as a loophole to the ACA. Their perception is that self-insurance is a way to bypass ACA requirements, that self-insuring employers will hoard the good risks” and keep them out of the exchanges.

Adverse selection, which in the case of the exchanges would mean an overpopulation of older, less healthy (i.e., riskier) participants, would put serious pressure on carriers to keep rates affordable and coverage sustainable. Virtually any insurance program requires a broad spectrum of risks to function properly, with good risks offsetting and subsidizing the bad ones. If the health exchanges fail to attract a diverse base of participants, they could unravel.

“What is the population going to be in the exchanges after a year of claim experience?” says Joel Wood, The Council’s senior vice president of government affairs. “That’s where self-insured plans become vulnerable. The pressure will be on the administration to incent younger, broader participants into the exchanges.”

Mitchell Andrews, a partner at brokerage firm The Plexus Groupe, in Deer Park, Ill., says, “I do not believe the Affordable Care Act is threatening self-insured plans, at least not yet. If anything, it will become more of a boon as employers look for flexibility in plan design and cost savings. A potential threat is the noise in states such as California, which are looking into placing limits on reinsurance.”

A California Senate bill would increase the stop-loss coverage attachment point to $95,000 per individual covered. The Kaiser Family Foundation, in a nationwide survey conducted in 2013, found the average individual stop-loss attachment point for self-funded plans between 50 and 199 lives was about $96,000. Kaiser says there’s insufficient data to track stop-loss attachment points for the under-50 lives segment. The stop-loss measure was introduced in 2012 and passed by the state Senate, and the California Assembly has indicated it will revisit the measure this year. Other states, including Minnesota, are expected to propose similar stop-loss legislation, according to the SIIA.

“When the California Senate passed the stop-loss bill, the intent of the law was to make it more difficult for employers to self-insure, to protect the insurance exchanges,” Ferguson says. “If you cut off stop-loss insurance, that effectively strangles self-insurance for the small and midsize market.”
Numbers from the California Healthcare Foundation suggest that would be a big disruption. According to the foundation, 36% of Californians were enrolled in a self-funded or partially self-funded health plan in 2013.

“From an industry standpoint,” says John Kirke, president of Employee Benefits and Health Risk Management at IMA Financial Group, “the encroachment of regulation into self-insurance makes us more fearful” that regulators will go further and options for clients may become more limited.

“It’s like the states landing on the moon but they really want to go to Mars,” Kirke says.

“Michigan is encroaching with a 1% tax on claims,” Kirke notes, referring to the 2011 Health Insurance Claims Assessment Act, which levies a tax on claims paid by third-party administrators, self-insuring entities and carriers. “California may be losing fully insured premiums to a self-insurance strategy, and they would be losing the premium tax that goes with that—in a state that can’t afford to lose tax revenue,” Kirke says.

Insurance regulation has long resided with the states, and the Employee Retirement Income Security Act has pre-empted state regulation of employee benefits since 1974. Self-funded health plans fall somewhat in between, but historically, Ferguson says, they have been treated differently from fully insured plans. And that might be part of the problem now.

Federal Threats

In 2014, Ferguson says, the SIIA is “prepping for new battles at the state level and dealing with the threat at the federal level.”

But wait. The federal government cannot regulate insurance. What the SIIA and others, including The Council, are concerned about is indirect action by federal agencies that could restrict access to self-insurance.

“Here’s a point of trivia,” Ferguson says: “There is no definition of a self-insurance plan in any federal statute.” But the three agencies charged with implementing the ACA—Treasury, Health & Human Services and the Department of Labor—have general rule-making authority.

“There is a lot of latitude within the administration, from an executive order standpoint, to put the squeeze on self-insured plans, especially stop-loss plans,” Wood says. “There’s not an immediate threat, but there is considerable anxiety. Employer-sponsored plans are under threat at the federal level where the right meets the left.”

Scott Sinder, the CIAB’s general counsel, concurs. “There is some chance the Department of Labor will come in and say to employers, ‘You have to have some risk to be self-insured,’” Sinder says. “But even with stop-loss contracts, there’s tail risk.”

The SIIA is particularly wary of the federal agencies that oversee the ACA. “They have some degree of discretion to interpret or create definitions in the statute,” Ferguson says. “This administration is very aggressive in pushing the discretion of regulation to fit a political agenda.”

Self-Funding’s Benefits

Self-funded health plans, widely used among large employers and an increasingly attractive option for smaller groups, provide employers with greater flexibility and cost control in exchange for retaining more risk. The ACA also exempts self-insured plans from most of its requirements. That’s one reason more employers are interested in self-insurance options.

“The ACA has limited employers’ flexibility” in offering affordable healthcare benefits, says The Plexus Groupe’s Andrews. “The self-insured option lets employers gain back some of what they’ve lost.”

Study after study shows healthcare costs increasing annually, and employers have reached a point where their budgets can no longer sustain the rate hikes. The cost of healthcare benefits as a percentage of private-sector workers’ pay has steadily risen, to about 8% of wages in 2010, according to the Bureau of Labor Statistics.

Over the last 10 years, the average annual health plan premium for family coverage increased 80%, while workers’ contribution to that cost increased 89%, according to Kaiser/ Health Research & Educational Trust.

“Before the ACA, employers might have considered annual rate hikes as a cost of doing business,” Ferguson says. “But now they ask, ‘Am I going to have continued unpredictable rate increases?’”

For many, the answer leads them to consider self-insurance as a means to control some of those cost increases more directly. “We’re not seeing a wholesale migration but certainly more interest by employers in moving over to self-insurance arrangements,” Ferguson says.

Ken Ambos, senior vice president of employee benefits in the New York office of William Gallagher Associates, says: “The conversation level with employers about self-insurance has clearly ramped up. We have been in more dialogue in the past year with smaller companies about self-insurance than ever before.”

One of the reasons more employers are taking an interest in self-insurance options, Ambos says, is their increased investment in wellness programs to rein in healthcare costs. “Employers want to recoup these investments directly rather than see them accrue to the margins of a carrier,” Ambos says.

While the immediate uptake on self-insurance “has not yet been dramatic, we expect to see measurable movement toward self-insurance arrangements in the next cycle,” Ambos says. “The number of groups making the flip to self-insurance appears poised to be markedly up during the year, unless state-level political efforts to regulate stop-loss undercut this trend.”

John Kirke says he’s seeing greater interest among IMA’s clients. “The prevalence of conversations on self-insurance is leading our client sessions,” Kirke says. “The middle market wants to know everything about their plan funding options, including self-insurance.”

To contain benefit costs, some employers with lower-wage employee populations have resorted to offering so-called “skinny” health plans, which generally provide preventive care services only, not catastrophic coverage. Some skinny-plan offerings are accompanied by indemnity coverage that provides fixed-dollar benefits for specific services or hospital stays.

The Council’s Sinder believes those kinds of skinny plans are no longer permissible under the ACA. “Insurance companies can’t sell skinny plans in the under-100 (lives) market, and states do not allow skinny plans,” he says. “They’re only a self-insurance option.”

Andrews agrees. “As of January 1, skinny plans are not compliant with the ACA.”

So, what might replace skinny plans as a way for employers to keep costs low?

“In self-insured plans, employers need to work on the health and well-being of employees,” Andrews suggests. “Employers need to offer direct incentives to employees to keep healthcare costs as low as possible, participate in health and wellness programs and use plan designs appropriately to help steer cost-effective care. This combination will give employers the best opportunity to keep costs under control.”

The fate of preventive care-only plans, Wood says, is  “a lesser concern for us than forcing employers to do the math over dropping coverage and sending people to the exchanges.”

Ambos says WGA has not been seeing significant interest in developing or continuing skinny plans. Instead, some of the firm’s clients are seeking help in understanding whether shifting employees into exchanges is a viable consideration. “No client to date has taken that radical step of exiting plan sponsorship, but one would not have expected such a step being seriously evaluated two or three years ago,” he says.
With the administration delaying the employer penalty for non-compliance with the ACA until 2016, “businesses have a little more time to look at this,” Ambos says. “Those businesses with substantial seasonal employment and flexible workforce elements have particularly hard decisions to make.”

What’s a Broker to Do?

To help clients cope with the uncertainty in 2014, agents and brokers need to remain watchful and spend more time exploring plan options. “It’s important for employers to communicate with legislators on the stop-loss bills that this is an employer issue, not an insurance issue,” Ferguson says. “Brokers have to be the conduit to keep their clients engaged on this. It’s amazing how much influence you can have at the state level with a few well-placed employers in the community.”

Andrews advises: “Stay current on the continual changes to the law, and educate your clients on the impact to their business. Employers are still nervous about ACA and need our guidance and creativity.”

This year, Ambos says, “it’s about keeping employers apprised of political changes that will drive application of the law’s many moving parts.”

“The exchanges are competitive for us,” Kirke says. “It’s an option that our clients now have. We have to think about those as competitive and challenge the status quo, bringing more creative solutions to our clients.”

Amid the state and federal challenges, Wood says, “huge numbers of employers and the majority of clients are relying on their brokers to get them into plans that are fully compliant and manage their costs. Brokers often thrive in times of confusion and uncertainty.”