SB 1431, the measure to increase stop-loss limits and change other items for self-funded plans, is off the table this year but could be revisited next year.
"SB 1431 would have required employers to self-insure at least $45,000 per employee per year before seeking reimbursement for costs above that amount from the stop-loss carrier. This arbitrary dollar amount would have made this type of health care coverage too financially risky for many firms that choose this type of coverage", says Mark Christian, Director of Legislative Affairs for AIA, California Council.
Health care plans are termed fully funded and self-funded plans. A fully funded plan charges the same premium whether few claims, or several are made. Subsequent premium increases for the following year are based on group and pooled company claims experience. Self-funded plans pay claims as they are incurred. Raising stop-loss limits for self funded plans would jeopardize the existence of one of the industry's best-cost reduction methods- self-funding.
Don't Shoot the Messenger
Kevin De León, (D-Los Angeles) had introduced SB 1431, which would place some limits on stop-loss insurance. California Insurance Commissioner Dave Jones, speaking at a committee hearing, said stop-loss insurance threatens the success of the state's benefit exchange.
The key question is which system offers real incentives to hold the cost of insurance down? The answer is self-funded. Self-funded insurance policies transfer risk from the carriers to the firms, who have a vested interest in keeping their employees healthy, and typically design wellness programs suited to their own demographics. The most effective wellness programs are those that keep employers aware of possible catastrophes before they occur.
Self- funded plans are more likely to provide effective wellness programs than fully funded plans because they are "hands-on" as company executives directly participate in controlling costs.
The idea that self-funding threatens the success of the insurance exchange suggests that the exchange business model is not self-sufficient. A business model for the exchanges should rest on it's own merits and not interfere with a successful business model, self-funding, a concept that has lowered health care costs for decades. Why shoot the messenger?
Proponents of SB 1431 say that self- insurers are cherry picking good risk companies. Insurance is a zero sum game, whether it is offered on an exchange or on a self funded basis. The party who can best control costs are the insured, not a carrier, an exchange, or a third party. Why shoot the messenger?
What does this mean?
There is no doubt that health care costs are on an unsustainable path. The benefits of health care reform give everyone an opportunity to obtain care. The challenges will be funding and pinpointing real medical inflators. This chapter remains to be written.
Fully funded plan lacks the incentive to control costs by not addressing the specific groups health pattern since premiums are reflective of a pooled set of insurance risks. The irony is that carriers offering fully funded plans are themselves self-funded, and utilize reinsurance to capture unanticipated, higher than expected claims. It is ironic that the PPACA wanted to hamper a stop loss methodology used by carriers who will provide fully funded plans to the exchanges. Without reinsurance, i.e. stop-loss, insurance carriers would not survive large claims.
Exchanges offering fully funded plans and self-funded plans should compliment one another. For example, if a self-funded group has a high claims year and opts to join the exchange, it will do so with a bad claim year behind them, in most cases, thereby deeming the group as healthy, or normalized.
The danger in consolidating all groups into a "one size fits all" strategy could sacrifice quality of care, bureaucracy and loss of control.
Furthermore, how can a successful business model that self- contains health care costs be a loophole? If companies are forced to merge into and exchange because self funding is no longer feasible, does this not result in spending good money (tax payer dollars) after bad money (higher mixed premiums from the pooled exchange) in the form of higher costs?
Self Funding, Not a Panacea
Self-funding is a hands-on approach, which requires a commitment and may not be for everybody. Self-funded groups are not immune to large claims and sky rocketing rates but are superior in discretionary spending and cost- cutting abilities. Hence, the Kaiser Family Foundation, in 2010, cited self-funded plans averaging premiums 8% to 10% lower than fully funded plans.
In Summary, a focus on eliminating medical inflation and the true costs is needed next. Self-funded plans need to be an adjunct to this battle and should not be viewed as part of the problem but part of the solution, as they have always been. The legislature should leave self-funding stop loss limits alone in 2014 and thereafter.
John Buckley is a health care agent, at John Buckley Advisors, a supporter of health care reform and efforts to find the root causes of health care inflation.