Risk Management

Law Preserves Self-Funding as an Option for Many Companies

But firms in New York and California with 51 to 100 employees may not be as lucky.
David McCannOctober 21, 2015
Law Preserves Self-Funding as an Option for Many Companies

A law signed by President Obama on Oct. 7 with little fanfare could effectively save thousands of companies from losing the option to lower costs by self-funding employees’ health benefits.

ThinkstockPhotos-452017615The Protecting Affordable Coverage for Employees Act (PACE) gives states leeway in defining what constitutes a “small group.” Since the 1996 enactment of the Health Insurance Portability and Accountability Act, insurers in most states have been required to provide “community-rated” health insurance to employers with 50 or fewer full-time-equivalent employees (FTEs). That means all policies within a given area are priced the same, regardless of individuals’ health status. Employers with 51 or more FTEs are subject to “experience-rated” pricing, which is based on claims history.

A provision of the Affordable Care Act (ACA) requires states to change the definition of “small group,” as of Jan. 1, 2016, to one with 100 or fewer FTEs. However, PACE nullifies that provision, instead allowing states to choose either 50 or 100 as the threshold above which experience rating kicks in.

A majority of states, some of which had been in the process of enacting new legislation to comply with the ACA provision, are expected instead to keep the small-group definition at 50 FTEs, according to Adam Brackemyre, director of government relations for the Self-Insurance Institute of America (SIIA).

Those decisions generally would be nods to small businesses that could be hurt financially in states where 100 does become the new employee limit for “small groups.” In such states, employers with 51 to 100 FTEs would then be offered community-rated insurance rather than claims-related insurance, which would initially act to raise pricing for healthier groups and lower it for less-healthy ones.

But if pricing were to go up for employers with healthier workers, many of them would likely seek to make up for that by self-insuring, which over time is generally several percentage points less costly than buying insurance policies, and buying stop-loss insurance to pay for unexpected catastrophic claims. And with healthy groups leaving the small-group market, the remaining ones would see their rates shoot up as well.

PACE largely undoes that scenario, but there are exceptions. In New York, employers with 50 or fewer FTEs are prohibited from purchasing stop-loss coverage, without which self-funding is far too risky for companies of that size. The state legislature passed a law in 2013 that expands the prohibition, as of Jan. 1, 2016, to companies with up to 100 FTEs.

Two bills have been introduced seeking to quash that law. One would make the stop-loss ban applicable in perpetuity only to the 50-workers-and-under employers, but it’s stalled in committees, with 2016 just over two months way. The other bill, which has passed both houses of the legislature, would grandfather stop-loss coverage for employers in the 51-to-100-worker category for two years.

However, says Brackemyre, the bill apparently has not yet been sent to Gov. Andrew Cuomo for his signature or veto, and Cuomo hasn’t said whether he’s in favor of the bill. “My guess is that New York would be unlikely to move the small-group definition back to 50 [FTEs],” Brackemyre says.

In California, a law that took effect last year prohibits stop-loss insurers from issuing policies carrying annual deductibles of less than $35,000 per covered individual to employers with 100 or fewer FTEs. In other words, the catastrophic insurance does not kick in until a covered person has racked up $35,000 in medical bills.

That limit, which will rise to $40,000 in 2016, is too high to make self-funding economically viable for virtually all employers with 50 or fewer FTEs, and many of those in the 51-to-100 category as well, according to Brackemyre.

California, like New York, has already changed its definition of “small group” to 100 or fewer FTEs and is unlikely to reverse that move. It’s a public policy goal for many California politicians to enroll as many people as possible in the state’s Small Health Options Program (SHOP), a public insurance exchange for small groups. Under the ACA, all states must have a SHOP.

The federal government, of course, itself is motivated to drive usage of healthcare.gov, the private exchange it runs in the approximately three dozen states that opted not to create and run an exchange themselves. Last November, the Labor Department issued guidelines pointing out ways states could regulate stop-loss insurance without violating the Employee Retirement Income Security Act.

Other states that have expanded the definition of “small group,” like Colorado and Virginia, are more likely than California and New York to revert to the lower threshold, according to Brackemyre.

Maryland, too, raised the minimum deductible threshold for stop-loss coverage, starting this year. The threshold is now $22,500, up from $10,000 previously.

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