Sensing a fresh threat to state and federal healthcare reforms, California insurance officials are seeking new limits on a controversial form of health coverage insurers are selling to small employers.
At issue is a new type of self-insurance for small businesses with as few as 25 workers.
Critics said insurers such as Cigna Corp. are using these new plans to game the system and cherry-pick companies with healthier workers. They said this could undermine a key goal of the federal Affordable Care Act to lower premiums by pooling together more healthy and sick Americans into insurance exchanges.
Premiums could continue to escalate without a diverse pool of consumers. That prospect has federal health officials weighing action against this practice as well.
Insurance officials say that they are responding to employer demands for more affordable coverage and that regulators shouldn't interfere in the market. Mike Ferguson, chief operating officer at the Self-Insurance Industry Institute of America, a trade group, said there's no evidence that insurers are targeting companies with healthier employees.
"We are concerned about regulators' actions because self-insurance is arguably one segment of the healthcare market that is working well," Ferguson said. "These companies are generally able to control costs better and offer more customized benefits."
Self-insurance, in which employers pay medical providers for their workers' care, has traditionally been used only by large employers that have the financial resources to pay for expensive medical claims. A Kaiser Family Foundation study found that 60% of U.S. workers with health coverage were in self-insured plans last year.
Now some insurers are chasing after much smaller customers with new plans designed to limit employer payouts for big claims using what's called stop-loss policies. This guarantees that businesses won't be responsible for anything over a certain amount per employee, perhaps as low as $10,000 or $20,000, with the rest paid by an insurer. Regulators and health-policy experts say this arrangement undercuts the notion of self-insurance since employers aren't bearing much of the risk, and it allows companies to circumvent some state insurance rules.
"This is not real self-insurance. This is clearly a sham," said Mark Hall, a professor of law and public health at Wake Forest University who has studied the small-business insurance market. "Regulators have good reason to be concerned about the potential harm to the market."
Self-insurance is attractive for many reasons, particularly the prospect of lower costs. It's exempt from state insurance regulations such as mandated benefits, granting employers the flexibility to design their own benefit package and the opportunity to reap some of the savings from employee wellness programs. A federal law, the Employee Retirement Income Security Act, or ERISA, governs self-funded plans. Some aspects of the Affordable Care Act do apply to self-insurance, such as the elimination of caps on lifetime benefits and some preventive care at no cost.
California Insurance Commissioner Dave Jones will unveil proposed legislation next week that would bar insurers from selling stop-loss policies below a certain amount. The specific dollar figure is still under consideration, but some experts recommend a minimum of $40,000 per worker. This proposal would make these new self-insured plans less attractive for small employers because they would be on the hook for more employee medical bills.
"The goal of the legislation is to help ensure the success of the small group market as significant healthcare reforms are going into effect," said Janice Rocco, California's deputy insurance commissioner for health policy. "There's a concern carriers are selling a product that's not really appropriate for small groups."
Officials in the Obama administration are keeping a close eye on developments in California and other states where insurers are aggressively selling these plans.
"We are working carefully to ensure that consumers in all markets have the protections guaranteed by the Affordable Care Act and will provide more clarity on the tools available to reinforce these protections soon," a spokesman for the U.S. Department of Health and Human Services said.
Monday, the U.S. Supreme Court will begin hearing arguments over the constitutionality of the federal healthcare law and its mandate that individuals purchase health insurance.
About 3 million Californians get health coverage through small businesses with fewer than 50 employees while 15 million are insured through larger employers, according to the California HealthCare Foundation. Small businesses are eager for new options since the average premium for employer coverage in California has increased 154% over the last decade, more than five times the 29% increase in the state's overall inflation rate.
Anthem Blue Cross, California's largest for-profit insurer and a unit of WellPoint Inc., began selling these self-insured plans to employers with as few as 35 workers March 1, down from its previous minimum of 250 employees. Assurant Inc., a New York-based insurer, is selling plans to companies in California and other states with as few as 10 workers.
Marc Neely, vice president for Cigna's self-insured business in 14 Western states, said his sales to small businesses with as few as 25 people are growing at a double-digit rate because employers are fed up with annual rate hikes of 10% to 15% on their traditional plans. Neely said Cigna offers stop-loss coverage as low as $20,000 per employee. "We're excited about California as a growth market for us," Neely said.
Higher stop-loss amounts are more the norm. The average stop-loss policy for firms with fewer than 200 workers was $78,321 per employee last year, according to the Kaiser Family Foundation. Larger firms had stop-loss coverage of $208,280 per worker, on average.
Some other states have already taken action. Oregon and New York ban the sale of stop-loss insurance to employers with fewer than 50 people enrolled, making self-insurance unappealing. However, there is debate over states' power in this area because the ERISA law generally bars state regulation of self-insured plans.
This issue has even split the insurance industry. For instance, Blue Shield of California supports the state's bid for tougher rules. But that hasn't stopped the company from following its rivals by introducing self-insured plans in December for companies with as few as 100 employees. Previously, the company wouldn't go below 250 workers.
"It has the potential to take out the favorable risks and destabilize the fully insured market," said David Joyner, Blue Shield's senior vice president of large group and specialty benefits. "There is a risk of cherry-picking."
Joyner said it's "silly" for insurers to provide stop-loss coverage as low as $10,000 to $20,000 since that's not how self-insurance typically works. But Blue Shield isn't willing to completely cede the market to its rivals. "We definitely need to offer something because our competitors are," Joyner said.
Self-insured plans have an immediate cost advantage since there's no state tax on insurance premiums being passed along by an insurer. Starting in 2014, they will also avoid additional fees levied on health insurers to help pay for the federal healthcare law. The Self-Insurance Institute of America estimates companies can save 3% to 5% annually through better claims management.
Small businesses switching to self-insurance do gain more insight into why their medical costs might be rising so fast because they have access to detailed claims data. (Employee information is protected under federal privacy law.) Under California law, insurers aren't required to share those details with an employer on a traditional health plan. Cigna's Neely said companies like the ability to see whether their employees' use of healthcare is above average and to make changes in the benefit package to bring those costs in line.
Sima Reid, a broker and president of Twentytwenty Insurance Services in Lakewood, said she has seen a surge in interest among smaller businesses frustrated with soaring premiums. But she warns many small employers against making the switch.
"This is not a silver bullet for everybody to save 30% off the cost of providing healthcare to employees," Reid said. "This doesn't all of a sudden make sick people healthy."