Back in October 2013, a few months before most of the Affordable Care Act provisions that restructured health insurance markets took effect, a broker described the great lengths to which he thought many small businesses might go in order to keep their relatively low insurance premiums. He anticipated that these small companies would start to pay employee health care costs out of their own treasuries — what’s called, in the industry, self-funded insurance.
While self-funding is common among larger companies — those with at least a couple hundred employees — few smaller firms had the wherewithal to self-fund employee health care. Self-funding is extremely risky, and while a bigger company can spread those risks across a bigger payroll, they can swamp a smaller business. And for the last three years, the broker’s prediction didn’t materialize. According to the Kaiser Family Foundation’s most recent survey of employers, the share of insured workers in small firms (those with less than 200 employees) in self-funded plans stayed low, and has even fallen. In 2016, it stood at 13 percent.
But a new study published by the Urban Institute suggests that this could soon change. The report, which examined small-business insurance markets in six states, found that insurers and brokers are quickly warming to self-funded insurance arrangements — sometimes called level-funded plans — for small companies. One broker told the authors, all research professors at the Georgetown University Health Policy Institute, that the new arrangements are “the next best thing since I don’t know what in health care.” All of the largest insurers, including United Healthcare, Aetna, Cigna, and Blue Cross affiliates like Anthem and Humana, now offer self-funded arrangements.
Though the employer pays the cost of medical services in a self-funded plan, insurance carriers have added elements to make it more palatable to smaller groups. A worker who gets seriously sick or hurt can expose the self-funding company to hundreds of thousands of dollars — or more — in medical bills, so the small business can buy back-up, or stop loss, insurance that reimburses the company when claims exceed a certain level. And because the timing of misfortune, too, is unpredictable, carriers have created a mechanism, level funding, that smooths the payments into equal monthly installments. (If claims are low and the company overpays, the carrier reimburses it at the end of the year.) The insurer administers the arrangement and can offer lower rates for medical services through its network of providers.
Many of the Affordable Care Act’s market reforms, including the coverage requirements known as essential health benefits, do not apply to self-funded plans, so in theory, these employers can decide for themselves what they will or won’t cover. But companies that self-fund are not part of any insurance carrier’s risk pool, and that is the real draw. The Affordable Care Act ended the practice in the small-group market of using a group’s claims experience to set rates, and instead required insurers to pool the risk across all of their small group business, which is known as community rating. That was good news for businesses with older or less healthy workers, which saw their premiums moderated by younger and healthier groups. But naturally it’s bad news for those younger, healthier groups. “The ACA changed the ballgame for the small group market and increased the incentive for smaller and smaller groups to self-fund,” says Sabrina Corlette, one of the study’s authors.
But for several years they didn’t. Many of these healthy small groups have been able to keep the plans they had in 2013, complete with health-history underwriting, thanks to rules from the Obama administration. Those rules have been extended to permit these “grandmothered” plans to remain in effect through the end of next year. So it’s unclear why insurers are promoting self-funding now. It’s possible they’re aiming it at new businesses that weren’t around (or insured) in 2013 and would otherwise have to buy plans that comply with Obamacare rules.
But regardless, insurers do appear to be marketing these plans to ever-smaller groups. In 2013, Aetna identified the market for its self-funded plans as mid-sized companies with 100 to 500 enrolled employees, but it now says that self-funded plans can be a good fit for companies “regardless of size.” One broker told the Georgetown researchers, “Originally it was 25 and up, and now [insurers are] looking to going down as low as 10 people.” Or even lower. When it announced earlier this year that it would offer Aetna’s self-funded plans, the HR platform and broker Zenefits pitched the product to companies with as few as five enrolled employees. (Where insurance companies are usually circumspect about the point of self-funding, Zenefits, like other brokers, is blunt. “In general, groups should be healthy and expect a low number of high-cost claims,” it said the announcement, “and want to move away from the ACA community rating.”)
And states appear to be paving the way for this charge. Until recently, states made it difficult for small groups to buy stop loss insurance, says Corlette. “They felt that these were too risky or that the small businesses were not sophisticated enough to enter into these arrangements.” The stop loss insurance, if it’s not considered health insurance, can be priced according to a group’s claims experience. But in 2017, three of the six states the researchers studied changed either laws or regulations to make it easier for small companies to buy the stop loss insurance that makes self-funding feasible. Corlette says these moves indicate a broader trend to deregulate the market.
But Corlette and the other researchers say self-funded plans will further divide an already segmented small-group risk pool. If the Obama-era grandmother rules are good for healthy businesses, they are decidedly bad for older and sicker workforces with insurance that complies with Obamacare rules. “There are winners and losers when you segment the market either with grandmothered or self-funded plans,” Corlette told me back in February. “Over time, of course, the problem is that in the portion of the market that is serving those older and sicker groups, premiums go up, and you have the health insurance death spiral. You have more employers unable to afford the premiums, and they drop out, and you see a deterioration in that market. So over the long term, it’s fundamentally destabilizing to have this kind of segmentation.”
In the new report, insurers told the researchers they are already anticipating this outcome. An insurer in Minnesota is planning higher premiums for Obamacare plans. And in Pennsylvania, a carrier confided that it would eventually withdraw its fully insured plans for small businesses. “To be honest with you, we wouldn’t offer an ACA small-group product in the future,” the insurer said. “We’d basically have level funded down to 8–10 life groups, and everyone else would have to go to an individual product.”