Small employers are facing formidable hurdles as they consider self-funding health insurance plans. But self-funding still holds appeal.
Increasing regulation of self-funded health plans is complicating the efforts of some employers as they seek an alternative to plans offered under the Affordable Care Act, one analyst says.
Most of the stiff regulation involves stop-loss, the reinsurance that protects employers from catastrophic losses.
The regulatory hurdles still are not enough to deter many employers who see self-funding as the better option, says Tim Callender, vice president of sales and marketing for The Phia Group, a consulting company that offers healthcare cost containment services.
Self-funded plans are regulated by the Employee Retirement Income Security Act of 1974 (ERISA), a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry, but states are increasing their regulation also, he says.
"There is a lot that goes on at the state level to regulate stop-loss re-insurance, which is super important to small employers because even if they are cash-rich they won’t have the same cash as a large employer," Callender says.
"We're seeing a lot of activity at the state level to regulate who can purchase these stop-loss policies and how, and that can make it more difficult for the small to midsize employers–up to about 250 employees–to self-insure."
At the federal level, the dysfunction in Congress regarding healthcare actually is encouraging self-funding, Callender says.
"Under the Affordable Care Act, the state exchanges are failing and the trend on the carrier models is to more expensive products and that is scaring employers away from the traditional health insurance model," he says.
"The result is that a lot of brokers and advisers are telling employers to start looking at self-funding. We're seeing a growth in self-funding over the last few years, a lot of it directly related to how the Affordable Care Act played out with employers seeing their costs go up under the fully insured model."
Why Self-Funding is Growing
The big health plans, including Blue Cross and Aetna, have noticed the increase in self-funding and are getting into the third party administrator (TPA) business, Callender notes.
They want to get their hands on some of that revenue even if the employers opt for self-funding instead of buying plans from them, he says.
"Self-funding is healthy and growing because healthcare costs are skyrocketing and the Affordable Care Act only made them go higher," he says.
"People look at the news with people saying they're going to replace it and do this idea instead or that idea, but we just don't see that happening. Nobody is really sure what's going to happen, or that anything will happen any time soon, so employers are looking for a way out."
Moving to a single-payer model would destroy self-funding, but Callender says that is extremely unlikely.
Overregulation at either the state or federal level also could drive employers away or make the strategy untenable. Tightening restrictions on stop-loss coverage is the most likely way that could happen, he says.
"The beauty of self-funding is that is functioning in a free market environment, allowing employers to self-fund and purchase stop-loss on the back end for a catastrophic spend. That is what allows self-insurance to exist," he says.
"If that were to go away or become very cumbersome for employers to do, it would push certain sizes of employers out of that market. A 300-employee company is not going to take the risk of having an employee with dialysis or a premature baby this year. They have to have that insurance to back them up."
Gregory A. Freeman is a contributing writer for HealthLeaders.