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When Developing A Self-Insurance Strategy, Stop-Loss Coverage Is Key

Are you considering self-insuring your company’s group health insurance plan?  Many employers are but there is some concern that the appropriate level of individual stop-loss coverage will not be available when it comes time to make that move.

Many smaller employers across the country are exploring self-insurance for the first time.  In most cases this is being driven by a new tax or fee being assessed as part of the Affordable Care Act (ACA). If your plan is self-insured you are exempt from paying this fee. The law’s Health Insurers Fee (HIF)—also called the Health Insurance Industry Tax or Health Insurance Provider's Fee— can be as much as 2.5% of gross premium costs and applies to all fully insured health insurance plans.

Beginning in 2014, health insurance companies will pay the annual HIF fee based on net written premiums. Of course this fee will be passed along through the health insurance premiums paid for by employers and subsequently by their employees. The fee is permanent and will be used to fund premium tax subsidies for low-income individuals and families who purchase insurance through Public Exchanges, more recently known as Health Insurance Marketplaces.

An example of the impact on an employer group with 100 employees enrolled in their health plan is as follows.

  • 100 employees x $10,000 (avg. annual premium per employee) = $1,000,000 total premium
  • 2.5% (HIF) x $1,000,000 = $25,000 HIF, which would be added to the needed premium for that policy year

This cost will undoubtedly be burdensome for employers offering group health coverage; and as a result many health insurance advisors have begun to explore self-insured products for groups as small as 50 enrolled employees.  Self-insured products have historically been designed for much larger groups.  In fact most insurance companies would not have offered self-insured plans to groups unless they had at least 300 enrolled employees.  Over the past two years, though, it is not coincidental that many health insurance companies have lowered their threshold so groups with 50+ enrolled employees could consider some form of self-insurance, capitalizing on the market opportunity.

Let’s assume many smaller businesses with 50+ employees begin to migrate toward self-insured plans. Makes sense for the employer, right?  Well, consider the effect of this phenomenon on the ACA.  Remember, the ACA is counting on $8 billion in revenue from the HIF in 2014 alone!  This needed revenue is indexed upwards annually reaching $14.3 billion in 2018.

Understanding that this could pose a problem, states that support the ACA have raised concerns regarding the mass exodus of small businesses from the insurance marketplace.  Yes, this would mean millions of dollars of lost tax revenue, but that is not the only concern.  Businesses that are prime candidates for self-insurance tend to be those with a younger, healthier population. If these groups leave the insurance market place for self-insurance, the state and federal exchange pools will be doomed, all but guaranteeing devastating future rate hikes for public exchange products due to adverse selection.

As a result some states have begun initiatives to create laws that effect and/or limit the purchase of stop-loss insurance by smaller groups.  Stop-loss insurance is a key element necessary when developing a self-insured program.  It is an insurance policy that protects the plan from the exposure of individual catastrophic medical claims.

To date, four states passed legislation in 2013 that restrict or limit stop-loss coverage for small businesses. Read more here>>

The stop-loss industry is currently lobbying to prevent more states from adopting such laws claiming that stop-loss is not a health insurance policy and should not be subject to the ACA provisions involving the taxation of health insurance plans.

Momentum on this subject will most likely slow in 2014, with mid-term elections right around the corner. However, if you are an employer or an advisor keep a keen eye on this topic as it develops and check back here for a mid-year update.