Self-Insurance and the Affordable Care Act

Self-Insurance Loophole                             

The Affordable Care Act (ACA) requirements have resulted in small business owners revisiting their health insurance decisions. A growing number of small employers are avoiding the act’s requirements through self-insurance. Self-insurance is exempt from the ACA insurance taxes as well as from the law’s essential benefit rules.

What does self-insurance look like?

Self-insurance from an employee perspective works a lot like a regular health plan. Employers pay for the majority of health costs directly while working with an insurer or other company to process claims. Through the insurer or other company employers can buy coverage for claims exceeding a certain amount to protect themselves.  These policies are known as “stop-loss coverage” which can activate at as low as $10,000 of medical costs per worker. This means that if an employee is involved in a catastrophic accident with medical costs of $200,000, the business is only liable for $10,000 of those costs.

Who does self-insurance work for?

The growing population of small businesses using this type of coverage typically has younger workers and/or promotes a healthy lifestyle as part of their company culture. The company also needs to be able to accommodate for the fluctuating costs that arise from these plans. They may save money in years where their employees are healthy, but unexpected major illnesses in any given year could dip into their cash reserves up to the stop-loss coverage amount.

What are states doing about self-insurance?

Across the United States, state governments are looking into limiting small employers’ ability to provide this type of self-insurance to their employees through state law. Governor McCrory signed House Bill 649 into law on July 25, 2013 that allows insurers to provide stop-loss coverage to all employers except those who employ fewer than 26 “eligible employees”. The law also sets the stop-loss claims minimum to $20,000 for plan years beginning in 2013 versus other states where it can be as low as $10,000 mentioned previously. Setting the minimum at $20,000 does make it more difficult to afford even if more employers can now self-insure. A full version of this legislation is available here.  

What does the future hold for self-insurance?

Some view self-insurance as a loophole to the Affordable Care Act that should be closed. The cause for concern is that employers with younger or healthier workers will look to self-insure when it is convenient leaving those seeking health coverage through traditional routes to be older and sicker. This would drive up health insurance for those seeking the traditional health coverage route. For now, these ideas are not founded on any data and self-insurance looks like it is here to stay. Like a lot of business strategies, self-insurance can be a high risk – high reward scenario. However, for business that are looking for alternatives in the current health insurance marketplace it is certainly worth exploring.