Healthcare Reform Likely to Drive Smaller Employers to Consider Self Funding

Provisions of the Patient Protection and Affordable Care Act (PPACA) are causing shifts in the marketplace on all sides of the issue. Insurance carriers, employers, providers and consumers are each reacting to the government’s regulations that are designed to get everyone insured, control costs and improve health outcomes.

Three specific provisions of reform — medical loss ratio, the modified community rating and guaranteed issue of medical plans — will encourage organizations to consider a move away from fully insured funding to self insurance. Currently, only 13 percent of organizations with fewer than 100 employees fund their employee health plans in a self funded manner.

Congress suspected that PPACA could cause a shift and was concerned enough about it that they included a provision requiring the Department of Health and Human Services (HHS) to study the effect of the law on the self insured marketplace. Section 1254 of the legislation requires the Secretary of HHS to provide a report to Congress that determines the extent to which new insurance market reforms are likely to cause “adverse selection.” In layman’s terms, they wanted to know if the bill encourages small and midsize employers to self insure.

While the study was somewhat skeptical as to whether there would be a mass exodus to self funding after healthcare reform was implemented, it concluded that the “extent to which small employers move to self-insurance greatly depends on the reinsurance market.” The researchers believe that “if the reinsurance markets were to change and attractively-priced reinsurance coverage became widely available, then there would likely be a substantial movement of small employers to self-insurance.”

Medical Loss Ratio (MLR)
The new regulations placed on insurance carriers to spend no less than a certain percentage of a premium dollar on claims costs is called medical loss ratio. The loss ratio for large groups with more than 100 employees must be no less than 85 percent and groups with fewer than 100 employees must no less than 80 percent.

MLR has already had an impact on the marketplace.  Multiple carriers have left the medical insurance industry inevitably because their block of business could not meet the loss ratios or other PPACA requirements. Guardian and Principal Financial are examples of larger insurers that have left the health insurance market, but there are many smaller carriers across the country that have also exited.

Now that loss ratios are regulated, carriers are moving quickly to reduce their administrative costs in order to maximize profits.  One way carriers are achieving this is by paring down the number of benefit plan options they sell into the fully insured market.  This allows them to reduce the number of plan design elements and results in less choice and flexibility for plan sponsors.

Modified Community Rating
In 2014, the modified community rating provision of PPACA says that for employer groups with fewer than 100 employees, health risk is not allowed to be calculated into their rate. This new modified community rating requirement will eliminate the use of actual claims experience and minimize the amount an insurer can vary its rate development process.  Rates are typically based on age, tobacco use, family composition and geographic location.

What this means, from an employer's perspective, is that groups that have unfavorable demographics and poor claims experience will receive more favorable rates.  Conversely, groups that have good claims experience and better demographics will be rated up and not benefit as they previously had from the healthy habits of their employees, which lowered their premium rates.

For example, if a healthy group has a 0.7 risk factor, it could rise to a 1.0 risk factor, representing a 30 percent increase in premium rates. When you add in a 10 percent trend increase, groups could be looking at an overall 40 percent rise.  If employers with healthy employees opt for self insurance and leave the community-rated pool, this could cause adverse selection, resulting in increased rates for the employers left in the pool.

Guaranteed Issue
In 2014, PPACA mandates that health insurers sell policies to any person or small group with fewer than 100 employees who requests coverage. Known as guaranteed issue, this provision will make it easier for employers to “test the waters” of self funding and if the risk is too much or their claims turn bad, they can easily go back to being fully insured.

HCW Viewpoint
Because healthcare reform is reducing competition in the market place, an environment of rising healthcare costs is being fostered. Also, the MLR regulations and the threat of insurers paying rebates for not hitting the prescribed loss ratios will result in more conservative underwriting practices. Finally, the modified community rating will benefit some and not others. 

Since reinsurance carriers are not bound by loss ratios or modified community ratings, employers with healthy employee demographics that shift from a fully insured medical plan to a self funded plan can outperform their cost position and have more plan design flexibility.

Based on the current PPACA regulations, we believe more small employers will explore self funding as an option. Taking into consideration your organization’s demographics, risk tolerance and goals for self funding is a necessary step that will ultimately determine if this type of funding is a viable option to stem the tide of healthcare reform.

HCW consultants are prepared to help you evaluate your organization’s current funding model and guide you through any decisions that may prove to benefit your organization’s bottom line. Email us or call our office at (919) 403-1986 with any questions you may have.