While large firms often assume financial risk for enrollees’ medical care through self-insurance, small firms’ growing interest in the practice may pose challenges for policy makers, according to a new qualitative study by the Center for Studying Health System Change (HSC).
Self-insured firms typically purchase stop-loss insurance to cover medical costs exceeding a predefined amount and contract with a third-party administrator (TPA) to process medical claims and provide access to provider networks. According to the study, increasingly competitive markets for stop-loss insurance and TPA services are making self-insurance attractive to more employers, particularly small firms with 100 or fewer workers. Some carriers now offer stop-loss coverage to firms with as few as 10 workers.
“Rising premiums, new regulations on fully insured products and more competitive markets for stop-loss coverage all appear to be contributing to small firms’ growing interest in self-insured health benefits,” said HSC Health Researcher Tracy Yee, Ph.D., coauthor of the study with HSC Senior Consulting Researcher Jon B. Christianson, Ph.D., of the University of Minnesota; and HSC President Paul B. Ginsburg, Ph.D.
If more small firms opt to self-insure, certain health reform goals, such as strengthening consumer protections and making the small-group health insurance market more viable may be undermined, according to the study. A particular concern is adverse selection—attracting sicker-than-average people—in the state-based insurance exchanges created by reform and scheduled for implementation in 2014.
Self-insurance arrangements may offer advantages—such as lower costs, exemption from most state insurance regulation and greater flexibility in benefit design—that are especially attractive to large firms with enough employees to spread risk adequately to avoid the financial fallout from potentially catastrophic medical costs of some employees, according to the study.
But, self-insured employers still face uncertainty about the costs of health benefits, and the uncertainty increases as firm size declines because smaller firms are much more vulnerable to the costs of a catastrophic illness of only one or two employees. Stop-loss insurance helps mitigate the risk of large medical costs, and coverage kicks in depending on so-called attachment points, or specific-dollar thresholds that an employer must reach in health expenditures before a stop-loss carrier takes over payment of all or a percentage of medical claims.
According to the study, the market for stop-loss insurance is moving toward lower attachment points, with some carriers offering attachment points as low as $10,000. The availability of stop-loss coverage with “extremely low attachment points raises questions about how much risk self-insured firms are bearing and whether self-insurance is merely a way to avoid state insurance regulation,” according to the study.
The study’s findings are detailed in a new HSC Issue Brief— Small Employers and Self-Insured Health Benefits: Too Small to Succeed?— available here
. The study, funded by the Robert Wood Johnson Foundation and the National Institute for Health Care Reform, is an offshoot of HSC’s 2010 site visits to 12 nationally representative metropolitan communities: Boston; Cleveland; Greenville, S.C.; Indianapolis; Lansing, Mich.; Little Rock, Ark.; Miami; northern New Jersey; Orange County, Calif.; Phoenix; Seattle; and Syracuse, N.Y.
Along with 174 interviews with health plans, benefits consulting firms and other private-sector market experts on a variety of topics during the site visits, HSC researchers conducted literature reviews and additional in-depth interviews specifically on self-insurance with more representatives from health plans, reinsurers and third-party administrators.