Self-Insurance: Business Savior or Obamacare Nightmare?

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The Affordable Care Act’s complex nature has forced a great number of American companies to carefully consider the affordability of insurance. In its quest to make health care accessible and reform the health care system, the Affordable Care Act made it so insurers could deny no individual coverage, regardless of his or her health history. For many businesses, that clause meant an opportunity to mitigate the rising cost of providing employees coverage.

As written, the Affordable Care Act requires any company with more than 50 full-time workers to provide those employees with “affordable” health care. Business with fewer full-time workers do not have to comply with the employer mandate, but they may participate in the small business health options program, in which employers of 50 or fewer workers can purchase employee insurance if they choose.

Before the health care reform law was implemented, many businesses already offered employer sponsored coverage. Among those firms with 50 or more employees, nearly 95 percent provided health insurance, while businesses with 50 or fewer employers currently provide health insurance to approximately 17 million Americans. While those numbers indicate employer-sponsored health insurance coverage will remain static as the implementation of Obamacare progresses, it  increasingly seems as though that will not be the case.

Loopholes in the law could enable companies — even those beholden to the employer mandate — to lower their health care cost burden by shifting more expensive-to-insure workers to the individual exchanges. That strategy will create lower health insurance costs for the company health plan.

With health care costs skyrocketing, many business owners are now investigating whether it would be beneficial to pay chronically ill workers to leave the company health plan and purchase insurance through the exchanges created by Obamacare. The key is the self-insurance marketplace.

As the American public has begun to discover, the Affordable Care Act contains various exemptions, surprises, and omissions, and one of its major dispensations is for companies that “self-insure,” meaning they give employees a stipend to purchase their own insurance rather than purchase insurance for those employees.

As Mathematica Policy Research senior fellow Deborah Chollet wrote for a New York Times op-ed in May, self-insured plans do not have to offer the essential health benefits required by the health care reform law, they are exempt from the annual insurance fee that small insurance groups are required to pay, and they do not have to contribute to the state-based risk adjustment pools for insured small groups and individuals.

For those reasons, self-insured plans can be significantly cheaper.

According to Richard E. Twietmeyer of M3, a Madison, Wisconsin-based insurance brokerage, “a handful of our clients, mostly in the 100- to 1,000-employee self-insurance market, have independently inquired about this and sought out legal counsel on the question.” As he told Bloomberg, “it’s not something I’m suggesting.”

The problem is that the strategy may be illegal and put employers at risk for discrimination claims, Quarles & Brady attorney John L. Barlament told the news service. Despite the possibility of discrimination claims, he said he’s had “multiple conversations” with business owners and insurance brokers interested in paying chronically ill workers to obtain coverage via the individual exchanges rather than through the company health plan.

Early in its history, critics of the health care reform worried that companies would end employer-sponsored health insurance coverage and shift all their workers to the individual insurance exchanges, a fear that has yet to materialize. However, even if companies only send their most expensive-to-insure employees to the Obamacare exchanges, the marketplaces could be burdened.

The success of the exchange system — the cornerstone provision of the Affordable Care Act — depends on a proper mix of enrollees. Insurers calculated premium prices that were meant to be affordable on the assumption that young, healthy, and therefore cheap-to-insure individuals would be moved into the new marketplaces because their current plans would not comply with the Obamacare’s new benefit requirements and be canceled.

If those healthier individuals are outnumbered by an influx of relatively sicker enrollees, the risk pools will be unbalanced. Exchange risk pools must be broad enough to balance out the proportionally higher medical costs of the sicker and older individuals who were likely among the first to sign up.

No provisions to prevent employers from shifting sicker employees to the individual exchanges were written into the Affordable Care Act. “It’s almost like they forgot to include that clause on the exchange side of the equation,” Barlament told Bloomberg.  However, a spokesperson for the Centers for Medicare and Medicaid Services, the agency responsible for the operation of the exchanges, told the publication that an existing law  – the Employee Retirement Income Security Act — does govern employer health care and pension benefits.

That statute prevents an employer from discriminating between workers in offering health benefits, but it does not bar the company and the employee from making agreements in which the worker voluntarily declines coverage in return for a stipend to purchase coverage through an exchange. Of course, the company would have to offer the employee an incentive for declining the company coverage, not force that person to leave.

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