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Obama Administration Signals that Small Businesses May Not Get to Keep Their Self-Insured Health Plans.

Imagine that, in order to increase competition among grocery stores, the government created local farmers’ markets all across the country. Anyone could sell food within these farmers’ markets—including the grocery stores. But when the grocery stores refused to participate, the government enacted regulations to force them to do so. Thus, what was meant to encourage competition instead became the means of suppressing it.

Similarly, the Obama Administration has signaled that it may create new regulations in order to protect Obamacare’s online health insurance marketplaces called Health Insurance Exchanges. Despite Obama’s promise that if you like your health plan you can keep it, some small businesses may not be able to keep their self-insured health plans if the Obama Administration has its way.

Last month, the Department of Health and Human Services (HHS) published a Request for Information (RFI)[1] notice in the Federal Register signaling that the Obama Administration may regulate small, self-insured health plans, making it difficult or impossible for small businesses to insure their employee's health benefits themselves instead of purchasing a plan from an insurance company.

An increasing percentage of American workers obtain their health insurance from employers who self-insure their employees’ health benefits by assuming the risk of paying their employees’ health claims.[2]

Self-insurance is attractive to businesses because it provides them the flexibility to design their own health plan. Plus, many employers find it a less expensive alternative to purchasing health insurance from an insurance company. And, while self-insured plans are subject to federal regulation, federal law prohibits states from regulating them.[3]

Large employers that self-insure have the personnel to manage the plan and can spread their risk between their many employees. But small employers typically hire an outside, third-party expert to manage their self-insured plan. They also purchase stop-loss insurance to protect themselves from the potential of unusually high health claims.

For example, a small company might be willing to pay a limit of up to an average of $20,000 per employee for health claims in a year. But that company might be ruined financially if claims in a particular year spike too high. To protect itself, that company, then could purchase stop-loss insurance to reimburse them should their actual spending on health claims surpass a certain limit. That limit is called an “attachment point.” It is the point at which the stop-loss insurance plan kicks in and reimburses the employer for claims it pays over a chosen limit.

Stop-loss plans can have attachment points that are low enough to make it feasible for small businesses to accept the risk of implementing their own self-insured health plan.

While subject to many of Obamacare's new mandates, self-insured plans are not subject to the Essential Health Benefits, risk pooling, risk adjustment, rate review, or medical loss ratio mandates.[4]

This concerns liberal “consumer advocates” like Professor Timothy Jost of Washington and Lee University School of Law. Jost calls self-insurance a “loophole” in Obamacare.[5] Jost and other Obamacare ideologues have called on the Obama Administration to use its regulatory powers to close this so-called “loophole.”[6]
Their particular concern is that self-insured plans with low attachment points are a risk to Obamacare’s Exchange marketplaces. Now HHS, in its RFI is echoing this concern.

For this reason, we expect that the information collected from the RFI will be the basis of a future regulation. We further expect that such a future regulation may regulate self-insured plans with stop-loss insurance and thereby may attempt to make it difficult or impossible for small businesses to self-insure.

The problem with government-created marketplaces is that the government feels obligated to protect them—even at the expense of competition and market alternatives.


[1] Request for Information Regarding Stop Loss Insurance, 77 Fed. Reg. 25,788 (May 1, 2012) available at http://www.gpo.gov/fdsys/pkg/FR-2012-05-01/pdf/2012-10441.pdf.
[2] Michael J. Brien and Constantijn W.A. Panis, Deloitte, Self-Insured Health Benefit Plans 5 (Mar. 23, 2011) available at http://www.dol.gov/ebsa/pdf/ACASelfFundedHealthPlansReport032811.pdf.
[3] Employee Retirement Income Security Act, 29 U.S.C. § 1144(a) (2011).
[4] Timothy Jost, Loopholes in the Affordable Care Act: Regulatory Gaps and Border Crossing Techniques and How to Address Them, 5 St. Louis Univ. J. of Health L. & Pol’y 27, 77.
[5] Id . at 79-81.
[6] Id . at 80-81. See also Kathryn Linehan, Self-Insurance and the Potential Effects of Health Reform on the Small- Group Market , Issue Brief 840, National Health Policy Forum (Dec. 21, 2010) available at http://www.nhpf.org/library/issue-briefs/ IB840_PPACASmallGroup_12-21-10.pdf; Russell B. Korobkin, The Battle Over Self-Insured Health Plans, or ’One Good Loophole Deserves Another’ , 1 Yale J. of Health Pol'y, L., & Ethics 89–136 (2005); and Mark A. Hall, Regulating Stop-Loss Coverage May Be Needed to Deter Self-Insuring Small Employers From Undermining Market Reforms , 31 Health Affairs 316–323 (2012).