When it comes to health benefits, most employers want to figure out a strategy and stick with it, year after year. But what should small employers do when their existing plan faces increasing costs, less flexible design choices and the possibility of federal penalties?
Small employers (those with fewer than 199 workers) have been slow to embrace self-funding, especially since it historically only made sense for large employers. However, as the January 1, 2014 implementation date for the Patient Protection and Affordable Care Act approaches, many small employers are beginning to recognize that their most viable option may be to abandon their fully insured approach and switch to self-insurance with a stop-loss policy backstop.
Double-digit increases in health insurance premiums have been making news for months and recent articles mention a study by the Society of Actuaries that determined premiums for individual policies will likely rise across the country an average of 32% over the next three years. These costs are linked to a number of provisions contained in the federal law, such as mandatory coverage for more health care services.
Beyond the broad provisions of the new law, there are specific regulations that will drive prices for fully insured coverage even higher for small employers. This is a result of the Affordable Care Act limiting how insurers address the varying risks of different pools of employees.
Today, a small employer with a healthy employee population can purchase insurance for less than an employer of similar size with a less than healthy employee population. Under modified community rating, the federal law will soon prohibit health risk as a factor to calculate premiums for employer groups of fewer than 100 people. Many small employers will see their costs rise, despite attempts to encourage healthy habits and smart consumer choices.
At the same time that premiums rise, small employers are likely to see even fewer options in the fully insured plans they are able to offer. Insurers are streamlining business models in response to the federal law – and the result is less flexibility for employers.
This change is the consequence of the Medical Loss Ratio provisions of the Affordable Care Act. Under MLR, insurers must spend 85% of the premiums they collect on medical care for groups with more than 100 employees, and no less than 80% for smaller groups. With a tightly constrained budget for administrative costs and overhead, insurers are moving quickly to consolidate their operations. Those who were once willing to work with small employers to design custom coverage solutions now want all companies to fit into off-the-shelf plans.
Under the guaranteed issue rule, insurers must sell products to small employers with less than 50 employees regardless of the current health status of the workforce. A small business with less than 50 employees that tries self-funding and runs into problems is not frozen out of the fully insured market as they might have been in the past. They can capture the savings and regain control of their health benefits year after year with self-funding – and then return to fully insured benefits if and when that strategy makes more sense.
Although the full effect of the Affordable Care Act remains to be seen, the massive impact on every aspect of workplace health benefits is already being felt. Small employers that stick with what they have always done are going to be whiplashed by new government regulations that are driving prices higher and creating fewer choices. Instead, they should give self-funding a fresh look as a strategy that puts them in control while still retaining a safety net.
Fleet is president of AmWINS Group Benefits, a Charlotte, N.C.-based wholesale broker of comprehensive group insurance programs and administrative services.
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