Proposed limits on health self-insurance plans debated

Business and insurance groups are attacking a proposal by state regulators to impose new limits on a controversial form of health coverage that insurers are selling to small employers.

The California Department of Insurance is pushing legislation that calls for new rules on a type of company self-insurance that’s growing more popular as small businesses seek alternatives to ever-rising premiums for conventional health coverage.

State regulators elsewhere as well as federal officials are watching this debate in California closely because they are concerned that these policies will proliferate nationwide.

They fear that these plans would appeal to companies with healthier workers and, as a result, drive up premiums for businesses remaining in typical group plans. Regulators said that would undermine a key goal of healthcare reform: to lower premiums by pooling together more healthy and sick workers.

The legislation is scheduled for a Senate hearing Wednesday in Sacramento.

Normally, larger employers tend to self-insure because they would have the financial resources to pay for expensive medical claims.

Now insurers are pursuing smaller customers with new plans designed to limit employer payouts for big claims through stop-loss policies.

Such policies guarantee that small employers won’t be responsible for any medical payments over a certain amount per employee, perhaps as low as $10,000 or $20,000, with the rest paid by an insurer. Regulators and health-policy experts said this arrangement undercuts the notion of self-insurance because employers aren’t bearing much of the risk.

To address that, the state wants to ban stop-loss coverage below $95,000 per employee, raising the stakes considerably for an employer.

The California Chamber of Commerce and the National Federation of Independent Business oppose the bill on the grounds that it sets an unreasonably high dollar amount for small businesses. Likewise,Cigna Corp., a top seller of these plans, said the proposal could penalize small employers by putting these plans “out of reach financially.”

“We don’t want to eliminate an option for small employers who are struggling in the current economy,” said Marti Fisher, a lobbyist for the California Chamber of Commerce.

But the head of the state’s small business advocacy group said the organization hasn’t taken a position on the legislation because he sees the concerns on both sides.

Small businesses should have the opportunity to fund their own health plan, said Scott Hauge, president of Small Business California, but he also shares regulators’ concerns that costs could increase for small business owners who remain in the regular market.

“This could create an uneven playing field,” he said.

The National Assn. of Insurance Commissioners is in the process of updating its recommended limit for stop-loss policies. Its current limit of $20,000 per employee was last set in 1995. The average stop-loss policy for firms with fewer than 200 workers was $78,321 per employee last year, according to the Kaiser Family Foundation.

Some states, such as Oregon and New York, ban the sale of stop-loss policies to employers with fewer than 50 people enrolled, making self-insurance unappealing.

California insurance officials said their proposal strikes a reasonable common ground.

“Unlike other states that prohibit the sale of stop-loss to small employers, this legislation sets an attachment point [$95,000 per employee] so the product is still available to small employers in a way that creates a level playing field so the employer is actually self-insuring,” said Janice Rocco, California’s deputy insurance commissioner for health policy.

A trade group, the Self-Insurance Institute of America Inc., raised legal concerns about the state’s proposal and vowed to stop it in court if necessary.

Federal law governs employers who self-insure, and it would be improper for California to intervene in this way, argued Mike Ferguson, the group’s chief operating officer. The federal Employee Retirement Income Security Act, or ERISA, regulates self-funded plans and generally bars state rules that affect the administration of these plans.

“We will do everything to block this, and if we can’t we’ll likely pursue the matter in federal court,” Ferguson said. “This is not legal.”

Timothy Stoltzfus Jost, a law professor at Washington and Lee University, said states have authority to enact rules on stop-loss coverage and other states may follow California’s lead if the law passes.

He said this is more than just a problem for consumers and regulators since some insurers also worry about getting stuck with a disproportionate share of sicker workers in the traditional market.

“The insurers that don’t get into this will get creamed and end up with all the bad risks,” Jost said.

Citing those concerns, nonprofit insurer Blue Shield of California came out in support of the measure this week.

“Stop-loss insurers are using this product line to cherry-pick young and healthy small employers for coverage while leaving less healthy populations to the fully insured market,” Mark Weideman, vice president of government affairs for Blue Shield, said in a letter to lawmakers.

About 3 million Californians get health coverage through small businesses with fewer than 50 employees, and 15 million are insured through larger employers, according to the California HealthCare Foundation.