By Georgetown University McCourt School of Public Policy Center on Health Insurance Reforms
The U.S. House of Representatives Education & Workforce Committee is poised to advance a bill, H.R. 2813, that would encourage the expansion of self-funded employer-based insurance exempt from key Affordable Care Act (ACA) protections and preempt states’ efforts to stabilize premiums for small employers. Below is a lightly edited excerpt from Sabrina Corlette’s testimony before the committee, about the proposed legislation:
High health care costs are driving many small employers out of the fully insured group market and into “level-funded” health insurance arrangements. These products combine a self-funded health plan with a stop-loss insurance policy. An estimated 35% of covered workers in small firms are now in a level-funded health plan.
In general, self-funded employer plans purchase stop-loss insurance to protect themselves against catastrophic losses. The stop-loss policy indemnifies the employer once the health care expenses of the health benefit plan reach a certain dollar amount, which is called an “attachment point.” Once the attachment point is met, the employer plan is no longer responsible for claims expenses. The lower the attachment point, the less financial risk for the employer plan, putting into question whether the plan is, in reality, “self-funded.”
Self-funded plans, with a stop-loss policy (known as level funded products) can be attractive to employers with younger and healthier workers. They are exempt from most state insurance laws, including reserve requirements, mandated benefits, premium taxes, as well as state and federal consumer protection regulations. They are also not required to comply with critical ACA protections such as the prohibition on health status rating and the requirement to cover minimum essential health benefits. Further, because issuers of the stop-loss policy can use underwriting (i.e., the analysis of an employer’s claims experience) to determine a group’s eligibility for the policy and the rate, they are able to cherry pick healthy employer groups out of the fully insured market. Later, if an employee or dependent in one of those groups gets a high-cost medical condition, the issuer can dump the employer back into the fully insured market.
The proposal under consideration today would further encourage the proliferation of level-funded plans in the small-group market, posing three significant risks. First, many small employers may not realize the financial risks and fiduciary duties they take on when they self-fund their plan. Under the Employee Retirement Income Security Act (ERISA), the employer is the plan fiduciary, and can be personally liable if they fail to fulfil their fiduciary responsibilities. They can also be liable if they know, or should have known, of any breach by a co-fiduciary, such as the insurance company providing claims administration and issuing the stop-loss policy. The National Association of Insurance Commissioners (NAIC) has documented a number of consumer protection concerns associated with level-funded products, including excluded benefits, deadlines that leave the employer responsible for late-submitted claims, termination clauses that give the stop-loss issuer just 30 days to end the contract, without cause, and clauses that authorize premium increases at any time, including retroactively.
Second, if small employers with younger, healthier employees shift to level-funded products in significant numbers, it will leave employers with older, sicker workers in the fully insured small-group market. This causes adverse selection and in the worst cases, an insurance “death spiral,” in which premium rates rise for employers whose groups cannot pass the stop-loss issuers’ underwriting. Federal policies that encourage the expansion of level-funded products will create winners and losers among small employers. Those with young and healthy workers pay less (although they could have unexpected financial liability if an employee gets sick), while employers with older, less healthy workers pay more. At the same time, this legislation does nothing to address the underlying reason why there is an affordability crisis for employer-based insurance: the prices that commercial insurers pay for provider services and prescription drugs.
Third, the proposal explicitly preempts states’ efforts to prevent adverse selection in their small-group markets through the regulation of stop-loss insurance. Some states have prohibited the sale of stop-loss policies to employer groups below a certain threshold size; others limit stop-loss insurance with attachment points so low that the level-funded plan is, in effect, a fully insured group plan that should be subject to the market rules that apply to similar products. Yet state insurance regulators are best positioned to respond to issues affecting their small group markets and tailor responses to the needs of local small businesses.