More firms may self-insure, increasing costs for those who don't

ACA makes self-insurance easier for small businesses

Companies that employ a relatively young, healthy workforce may increasingly opt to self-insure their employees, likely raising costs for those who remain in the regular insurance market, the New York Times reports.

Self-insurance has been a growing trend—particularly among large employers—for more than a decade. An Employee Benefit Research Institute study found 59% of private sector workers were covered by self-insured plans in 2011, up from 41% in 1998.

However, the Affordable Care Act "created powerful incentives for smaller employers to self-insure," notes Deborah Chollet of Mathematica Policy Research, "This trend could destabilize small-group insurance markets and erode protections provided" by the ACA.

Prior to the law, self-insured employees who had to switch to the insured market were required to pay a penalty for the change. Under the new law, companies can switch without paying a penalty since insurers now "must accept every employer and individual" who applies for coverage.

How self-insurance works

Rather than pay premiums to health care insurers, self-insured companies instead cover the claims filed by employees and health care providers.

To protect themselves from unsustainable losses, these employers often enroll in "stop loss" insurance plans to cover unexpected and expensive conditions, such as organ transplants or caring for a premature infant.

States worry that self-insurance could raise premiums

Meanwhile, uncertainty created by ACA caused premiums to soar as high as 20% per year for small businesses. Many small businesses with healthier employees opted to self-insure to stabilize their health costs.However, insurance regulators are concerned that if companies with healthy, young staff increasingly self-insure, commercial insurers and insurance exchanges will be left with a disproportionate share of older, sicker people who are expensive to insure.

As a result, premiums for uninsured people who would seek coverage in the exchanges may climb, raising costs for the federal government—which will be subsidizing this covereage.

"The practice, if widespread, could worsen the risk pool and increase premiums in the fully insured small group market," the Obama administration wrote in a notice in the Federal Register (Pear, New York Times, 2/17).

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