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As provisions of federal health care reform continue to take
effect following the landmark US Supreme Court decision largely
upholding the Patient Protection and Affordable Care Act (the
"ACA"), employers are looking for ways to cut costs. Faced with
mandates to offer richer benefits with less cost-sharing, small and
mid-sized employers in particular are increasingly considering
self-insuring. Then, to mitigate the financial exposure of
self-funding, such employers may purchase stop-loss policies that
provide coverage above a certain threshold at both the specific
insured level and in the aggregate.
Certain regulators have taken the position that permitting
smaller employers to self-insure then purchase stop-loss coverage
permits an "end run" around the intention of the ACA market
reforms. They argue that such employers avoid the market reforms by
self-insuring, but then purchase stop-loss with attachments points
low enough that it minimizes the employer's financial risk to a
degree that effectively mirrors the effect of health insurance but
without the market reforms. To combat the perceived abuse of the
system, some regulators have introduced legislation that would
raise the minimum stop-loss attachment points.
Below is a brief overview of the ACA market reforms, the current
landscape, and recent and proposed legislation aimed at this
evolving stop-loss issue.
Coverage With Market Reforms Must be Offered by
Employers Under the ACA
On March 23, 2010, President Obama signed the ACA, which enacted
comprehensive reform of the private health insurance marketplace in
all U.S. states and the District of Columbia (the "Market
Reforms"). On June 28, 2012, the U.S. Supreme Court upheld the
validity of all aspects of the ACA that are relevant to the issues
of employer self insurance and stop-loss coverage. The ACA applies
to a group health plan (generally, an employer-sponsored plan) and
a health insurance issuer offering group or individual health
insurance coverage. Self-funded (self-insured) employer plans are
exempt from many of the market reforms required by the ACA, though
certain provisions do apply (for example, prohibitions on lifetime
and annual limits).
Market Reforms that take effect before 2014 for fully-insured
but not self-insured plans include medical loss ratio ("MLR")
provisions and annual rate review. Additional Market Reforms
effective as of 2014 for fully-insured but not self-insured plans
include mandatory coverage for essential health benefits, adjusted
community rating rules, and guaranteed issue and renewability
The cost of this coverage for employers estimated by some
observers to be approximately $500 per year per employee, with an
overall cost of approximately a trillion dollars according to some
estimates. Others have estimated that the market reforms with
result in an increase of 5-15% over current costs to employers. In
any event, the general consensus is that the market reforms will
either increase the costs of providing health care to employees or
encourage employers to consider alternative means of either
complying with or being exempted from the ACA requirements.
Tax Penalty for Non-Compliance as of 2014
The ACA does not expressly require that an employer offer
employees health insurance that complies with all of the Market
Reforms, but large employers (with at least 50 full-time equivalent
employees) will be subject to penalties as of 2014 if one or more
of their full-time employees obtains a premium credit through an
exchange (i.e., if the employer does not provide health
coverage to its employees). See Congressional Research Service
"Summary of Potential Employer Penalties Under PPACA" by Hinda
Chaikind and Chris L. Peterson (June 2, 2010). Employers with 50 to
approximately 100 employees, although classified as "large
employers" for purposes of the penalty, often in reality more
closely resemble small employers in terms of their ability (or
inability) to afford the health insurance premiums for coverage
that includes the ACA mandated coverages. As a result, this
mid-size market is increasingly considering self-insurance as a
more affordable alternative to provide coverage to employees.
Because employers that self-insure purchase stop-loss insurance to
limit their financial exposure, this shift towards self-insuring in
the mid-sized employer market appeared to be a market opportunity
for stop-loss carriers.
Regulators have begun focusing on stop-loss insurance, however,
concerned that employers moving from insured to self-insured plans
may be using stop-loss with low attachment points as a way to avoid
offering an ACA-compliant plan. In particular, employers may
self-insure to avoid having to comply with certain ACA provisions
and to save money. The employer would then purchase stop-loss
insurance to mitigate its financial exposure. Thus the employer
would avoid having to offer an ACA-compliant plan but would still
have limited its financial exposure—a scenario that some regulators
view as a "loophole" around the ACA.
On May 1, 2012, the Department of Health and Human Services
("HHS"), along with the Department of the Treasury and the
Department of Labor (each a "Regulator" and collectively, the
"Regulators"), issued a Request for Information Regarding Stop Loss
Insurance (the "RFI"). The stated goal of the RFI was to gather
information regarding the use of stop-loss by group health plans
and their sponsors "with a focus on the prevalence and consequences
of stop-loss insurance at low attachment points."
Regulatory Responses, History Repeating?
The issue raised now with respect to this ACA "loophole" mirrors
a similar concern from the mid-1990s in which the National
Association of Insurance Commissioners (the "NAIC") and state
regulators tackled the issue of stop-loss policies with low
attachment points being used as a "subterfuge" by self-insured
plans to avoid state insurance regulation. See Proceedings of the
NAIC, 1994 Proc. 3rd Quarter 650 and 1994 Proc. 4th Quarter 765.
(One regulator reportedly offered an anecdote of stop-loss filings
where the attachment point was as low as $250 per year. Proceedings
of the NAIC, 1994 Proc. 3rd Quarter 642.)
As a result, the NAIC adopted Model Act 92, the Stop Loss
Insurance Act, establishing minimum attachment points to maintain
stop-loss status as opposed to health insurance status. Stop-loss
policies with lower attachment points would be regulated as health
insurance under state law. (The minimum attachment points are
$20,000 per individual claim and vary for aggregate claims,
typically around 110 or 120 percent of expected claims depending on
the size of the employer.) Some version of Model 92 has been
adopted or addressed in fifteen states, but the majority of states
have not set minimum attachment points for stop-loss insurance.
As described in the RFI, an employer could, in theory and unless
prohibited by state law, purchase stop-loss with attachment points
so low that the stop-loss carrier would be assuming almost all of
the insurance risk. The example provided in the RFI describes
attachment points of $5,000 per employee or $100,000 for a small
group in a state that does not regulate minimum stop-loss
attachment points. At that point, although the employer has
arguably off-loaded nearly all of the financial exposure tied to
the insurance risk to a degree similar to a health insurance
policy, its employees would not receive the patient protections
required under the ACA because neither the employer nor the
stop-loss carrier would be subject to the ACA.
Now, the NAIC and state regulators are revisiting stop-loss
provisions in light of this most recent shift in the stop-loss
Changing the Risk Pool
In addition to the issue of attachment points, regulators are
concerned about the impact on the risk pool of the migration from
insured to self-insured coverage.
In the face of the ACA market reforms, it may very well become
increasingly attractive for smaller businesses employing younger
(healthier) employees to self-insure. These employers could save
money by paying claims rather than high premiums for insured
coverage and could limit financial risk with robust stop-loss
coverage. But, to the extent that a healthier segment of the
population leaves the insured market, the risk pool for the insured
market will become less healthy. Specifically, the average per
person claims for the insured market could increase and, as a
result, health insurance premiums would rise.
Action in the Current Climate
Since July 2, 2012, having been passed in the Senate, California
Senate Bill 1431 (SB 1431) remains pending in the Assembly
Committee on Health. As initially proposed, SB 1431 would have
raised the minimum attachment point for small employers (2 to 50
employees) to $95,000 per individual claim and the aggregate to the
greater of 120 percent of expected claims or $19,000 times the
total number of employees and dependents. As the bill makes its way
through the legislative process, the exact attachment point levels
are being revised. Nonetheless, the intent appears to be to raise
minimum attachment points to a level that would dissuade small and
medium sized employers from self insuring, because they could rely
on stop-loss to a far lesser extent to limit financial exposure.
The bill would also require stop-loss coverage for all employees
and dependents of the small employer it insures (which appears to
confuse direct health insurance coverage, which is provided to
individuals, with stop-loss coverage, which is provided to the
employer not the employees or dependents), without regard to health
status, and, with limited exceptions, would make the stop-loss
coverage guaranteed renewable at the option of the small employer.
In commending the Senate for passing the legislation, California
Insurance Commissioner Dave Jones stated that the legislation would
"protect California's small employers and their employees as
federal health care reform goes into effect," underscoring
regulators' perception that permitting low attachment points would
provide employers a loophole around the ACA requirements.
Taking a slightly different approach, Delaware recently amended
Section 7218(e) of the Delaware Insurance Code to prohibit a small
employer health insurance carrier from providing any stop-loss
policy to a small employer of 15 or fewer employees (subject to
certain qualifications). See 2011 Del. ALS 25; 78 Del. Laws 25;
2011 Del. HB 28.
In a similar action, bearing on the issue of the changing risk
pool, the New Jersey Department of Banking and Insurance recently
issued a bulletin in which it announced its intention to promulgate
regulations "to prohibit the consideration of health status in the
offering or pricing of stop-loss insurance offered to small
employers." "Selective Marketing Of Stop Loss Coverage," Bulletin
No. 11-20 (October 3, 2011). According to the bulletin, the
regulations will be aimed at the recent trend of stop-loss carriers
marketing their policies to small employers on the basis of health
history and denying coverage to employers based on employee health
status, a practice that reportedly had the effect of driving up
premiums in the guaranteed issue market.
The NAIC will reportedly also be updating stop-loss attachment
points to reflect more recent experience, as the current attachment
points were based on a study conducted in 1995. See "NAIC
Panel Eyes Stop-Loss" by Allison Bell (March 7, 2012).
Carriers of both health insurance and stop-loss insurance, small
and mid-sized employers, and regulators across the country are
watching this issue closely.
One hand, state regulators tasked with enforcing the ACA appear
to believe it is their duty to shut down the perceived stop-loss
loophole for small and mid-sized employers.
On the other hand, small and mid-sized businesses must be able
to provide coverage they can afford.
So, as always, the questions remain: Who will bear the costs of
the ACA reforms, and how can insurers and employers safeguard the
ability to use stop-loss coverage to rationally mitigate risk?
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