To insure or self-insure? That’s the policy question underlying pending California legislation that passed its first committee test this week. SB 161 is designed to reduce the incentive for small employers to self-insure their workforces for medical costs by making it less feasible for these employers to limit their losses once they reach a certain point. Supporters of the bill maintain it’s needed to give the state health benefit exchange’s Small Business Health Options Program (SHOP) the opportunity to bring down insurance rates by aggregating small employers’ purchasing power into a single buying mechanism starting in 2014. Click here for an analysis of the measure prepared by the Senate Health Committee, which passed out the bill May 2. A similar bill stalled in 2012.
Self-insurance arose as a solution for small employers beleaguered by rising small group insurance premiums over the past decade. But self-insuring medical risk is a high risk proposition for small employer since unlike large employers, they are unable to spread the risk of a large claim over a sizable group of employees. That’s why it’s a no go for small employers without “stop loss” coverage to kick in when an individual employee’s or all employees as a group incur losses in a policy year exceeding a set amount. SB 161 would bar stop loss coverage from protecting a small employer until an individual employee incurred medical bills of $65,000 or those of the entire workforce reach dollar amounts specified in the bill.
Opponents of the bill argue that the market should determine which approach works best for small employers: self-insurance or insurance. Other issues cause consternation among supporters of the measure. Only larger small employers are likely to consider self-insurance given the inherent risk that favors size. That could leave the SHOP with the low end of the small group segment – employers having less than 20 to 30 employees. This could reduce the SHOP’s market power with health plan issuers since there would potentially be fewer “covered lives” and larger employers to bring to the bargaining table. (In California, the small group market is employers with 50 or fewer employees.)
Apparently concerned about stop loss coverage’s potential to undermine the SHOP exchange marketplace, the U.S. Department of Health and Human Services issued a proposed rule April 5, 2013 barring entities with relationships to issuers of stop loss insurance, including those who are compensated directly or indirectly by issuers of stop loss insurance, from serving as exchange navigators.
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