Employer Self-Insurance and the PPACA

By July 7, 2011Commentary

Most large and many medium-size employers self-fund their health insurance coverage; that is, they bear most of the financial risk of paying for the services covered by the plan.  Self-funding is attractive for a variety of reasons, including the cash flow benefits, not delivering as much profit to insurers, avoidance of most state regulation and greater control over plan design.  In practice, most companies that self-insure do not self-administer–they hire outside firms, most commonly the large health insurers like Blue Cross, UnitedHealth, Aetna or Cigna, to administer the plan, including bringing a provider network and conducting medical management.  Thus a self-funded plan may look a lot like an insured one.  A lengthy Rand report discusses the likely impact of the reform law on self-insurance decisions, especially by small firms.   (Rand Report)

About 11% of companies self-insured in 2010 but they account for 58% of people covered by employment-based insurance.  Very few small employers self-insure.  Under the PPACA, new rules about how insurance must be designed and priced and the use of exchanges will complicate all employers’ decisions about health coverage.  Some small employers may find it more advantageous than before to self-insure, particularly if they can purchase reasonable stop-loss.  Employers with relatively low health claim costs will be most likely to self-insure, leaving a sicker pool in the exchanges.  In some states, i.e. New York, extreme limits on rating variability have led to destruction of the small group market, with what few insurers are left charging extremely high rates.  The Rand researchers, using an admittedly limited model, conclude that the overall effects of the PPACA are not likely to cause a large shift to self-insurance among small employers, which would hinder exchange functioning.

The researchers also found that there were concerns about the financial risk associated with self-funding in small groups and whether that risk might be passed on to the employees in the event the employer went bankrupt.  Another concern was whether claim denials might be more prevalent in self-funded groups, but the PPACA creates new appeal rights even in self-funded plans.  Historically, self-funded employers have been less likely than insured ones to deny claims, because it is their money and they want to keep employees happy.   Finally, the report finds that there is not usually any significant difference in benefit generosity between self-funded and insured plans.  Overall, this report provides a great background on self-funding and how it works, but the projections of future employer behavior are somewhat shaky.

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