Could small businesses skirt Obamacare’s mandates?

October 7, 2012

Bob Laszewski, a former insurance executive, has taken a look at how small businesses might dodge a number of the health law's (potentially expensive) mandates: They could self-insure.  

This is going to get wonky for a minute, but stick with me.

In self-insured plans, the employer assumes responsibility for for all health care costs of their workers - as opposed to paying out a per person premium to an insurance carrier. 

Essentially, self-insurance puts the employer at risk for any big, catastrophic health event that could happen to any of its workers. While that usually works out fine for large employers, who can spread the costs among a big pool of employees, it could cause costs to spike for a smaller company. For that reason, only about 10 percent of firms with fewer than 200 employees self-insure - but that number rises to 89 percent among firms with more than 5,000 employees. 

Many companies that self-insure also buy "stop loss" insurance, meant to protect again unpredictable, especially catastrophic events - the possibility, for example, that a number of employees need an expensive surgery at the exact same time.

The Affordable Care Act exempts self-insured plans from a number of mandates: They don't have to pay an excise tax if they provide more expensive benefits and don't have to adhere to the 80/20 rule, which requires insurers to spend at least 80 percent of premiums on medical costs. 

Laszewski wonders whether a free pass from those benefits might push small businesses to get a bit riskier.

The ability of small employers to in effect opt-out of the ACA's stiffest insurance reform requirements by moving to self-insurance is on the cusp of becoming a market trend. Some insurers are offering to take over the liability for individual health insurance claims (the "attachment point") as low as $10,000 in the very small employer health insurance market––the employer is on the hook for claim costs below that point. 

Regulators are worried about self-selection in the market––the healthiest small groups going self-insured and refusing to be part of the ACA's insurance exchange pool leaving only the sickest small groups to fall under the ACA.

Laszewski runs through a few ways that state legislatures could blunt this change, namely by raising that "attachment point" higher and higher. California, for example, has looked at legislation that wouldn't allow stop-loss insurance to kick in until $95,000 in claims per employee have been paid out. The stop loss insurance I mentioned earlier would only kick in after the employer has paid tens of thousands of dollars in claims.

That would make the move towards self-insurance, even with the freedom from mandates it offers, a significantly riskier proposal.


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