The thought is that by self-insuring, companies pay for only the health care their employees use, rather than fixed premiums that potentially are more expensive and are certain to rise each year. Self-funding also gives companies some insight and control over their health costs, as they see all claims activity and can to steer certain employees toward wellness programs.
The model is seen for some companies, such as those with a fair amount of cash on-hand, as a cost-effective alternative to fully-funded insurance plans, like those offered by BlueCross/BlueShield and others. About 62 percent of companies with more than 1,000 employees self-insured their health benefits in 2010, while that was the case for only 6 percent of firms with between three and 49 workers, according to a Rand Corp. study. Yet it appears the market for self-insurance among small employers is growing. In New Jersey, enrollment in small employer insurance market–which accounts for companies with between two and 50 workers–has dropped from 776,967 during the first three months of 2010 to 702,000 during the last quarter of 2011, according to data from the state Department of Banking and Insurance. DOBI officials believe some of that movement is linked to companies self-insuring their benefits.
But as more small employers look to this route, the state has warned insurers that help these companies manage their costs to not discriminate between healthy and sick workplaces.
A critical component of self-funding employee benefits is the purchase of stop-loss insurance. This coverage protects employers against catastrophic claims, such as chronic illness or a car accident. Stop-loss acts as a back-stop to a company’s self-funded plan: it kicks in once an employee or the company itself incurs medical bills beyond a certain threshold, reimbursing the company for claims that might otherwise devastate its bottom line.
However, DOBI has received complaints that some carriers selling stop-loss policies to small employers have been selectively marketing and underwriting coverage to groups with healthier workforces, which by definition are less likely to incur claims against the stop-loss plan.
The insurers allegedly used medical questionnaires to find out the health status of individual employees at a prospective small company client and set rates based on these factors. One introductory letter appeared to offer a teaser rate to companies that could be adjusted based on the outcome of a questionnaire, a DOBI spokesman said.
Carriers also used advertisements to entice young, healthy workforces to self-insure. "Ideal if your employees are healthy," read one insurer’s marketing material for a stop-loss plan for companies with five to 50 workers, the DOBI spokesman, Ed Rogan, said.
The concerns about such practices are two-fold: state law bars traditional health insurers from setting premiums of small companies using anything other than geography and the age and gender of employees. So it would be unfair for a stop-loss policy, which is not regulated as health insurance, to do differently.
And by enticing healthier labor pools to self-insure, the worry is that the fully insured market would become increasingly concentrated with sicker companies, thus pressuring cost of premiums to rise even higher.
To that end, DOBI issued a bulletin in October effectively barring stop-loss insurers from "cherry picking" healthier groups through selective marketing and medical underwriting. While stop-loss insurance is not subject to the laws and regulations covering health benefit plans, it is subject to the state’s trade practice requirements, DOBI said in its bulletin. It added that the department's position is that selective marketing and underwriting of stop-loss policies to small groups counts as a violation of these requirements.
The department said it plans to write regulations barring the consideration of health status when offering or pricing stop-loss policies to small employers. In the meantime carriers are "urged to refrain" from these practices, or else face potential sanctions.
The bulletin rankled some self-funding advocates, and led to at least one carrier pulling out of the small group market. Jason Kovar, co-president of WellNet Health Plans, said his company stopped writing stop-loss policies to small employers in New Jersey because it believes "the only way that you can write stop-loss effectively and at an appropriate price" is through accounting for individual health status or medical history. DOBI’s bulletin has created regulatory uncertainty about how carriers can write to this market, he said.
Others questioned the department’s legal basis for regulating stop-loss policies on the same grounds as a health benefit plan, signaling a battle to come when a formal regulatory proposal is introduced. "It’s not a health insurance product, it’s a reinsurance product. It has only one purpose, to reimburse catastrophic losses to self-insured plans," said Jay Fahrer, director of government relations for the Self-Insured Institute of America, which called the department’s bulletin "inflammatory and without merit" in a letter last year.
George Pantos, a former chief counsel of SIIA, said the state’s ability to regulate stop-loss insurance could be preempted by federal law. That's because stop-loss policies are a component of self-insured plans, which typically fall under the purview of the U.S. Department of Labor. He said the state should show proof that the fully insured market has been harmed.
Other stop-loss carriers are simply going along with the bulletin. Cigna, for example, continues to write stop-loss policies to workforces with as few as 25 employees, even though health status is useful for predicting claims experience, said Julie McCarter, vice president for product for Cigna’s Select Segment, which writes coverage for companies with between 25 and 250 employees.
"What’s important to us is in states like New Jersey that regulators are aware of the business we’re in, our business practices and the value of bringing coverage to small employers," she said.