Self-funding and the nonmarketplace

Fighting marketplace "leakage"
Despite a softening of some of the president's original rhetoric, the originally stated desire to eliminate other funding mechanisms and, thus, move closer to a single-payer system is alive and well, as evidenced by recent developments surrounding the growing popularity of self-insured plans. According to the Kaiser Family Foundation, today, more than 61 percent of covered workers are in a self-insured plan. In 2000, that number was just 49 percent.

Conventional wisdom held that the economies of scale for these plans (regulated under the Employee Retirement Income Security Act, or ERISA) would only work well for large employers. That is no longer the case. Today, these plans are becoming more and more attractive to companies with as few as 25 employees. Worried that this will keep some employers out of the marketplaces and PPACA plan designs, some in Washington are calling on federal regulators to eliminate what they term the self insurance "loophole" before more employers jump on the bandwagon.

On June 19, the Center for American Progress wrote and distributed an issue brief entitled, "The Threat of Self-Insured Plans Among Small Businesses." The authors write, "The Affordable Care Act exempts these plans from many of its reforms, creating an incentive for employers looking to avoid complying with the law's consumer protections to follow this path."

Concerned about the number of smaller businesses creating self-insured plans, they worry that "this shift in the small-employer insurance market would undermine key protections for small-business employees and increase costs for other small businesses that stay in the traditional insurance market."

While perhaps that will come to pass, that is how competitive markets operate. If PPACA proponents really want a free and open marketplace, all comers should be welcome. If buyers want to self insure after taking the up- and down-side risks into consideration, then let the other market players react as they see fit. That would encompass the "forces of demand and supply" in our original definition.

The authors of the Center for American Progress brief worry "the result of this shift could cause an insurance premium death spiral and threaten the stability of the exchanges — the health care law's new insurance marketplaces. This outcome is not inevitable. State and federal policymakers can halt this shift even without new legislation." Their focus is clear: to protect the PPACA marketplaces, even if it means making them less of a traditional marketplace and more of an oligopoly or monopoly. Fewer choices for consumers do not equal a vibrant marketplace. A sole choice is no market at all.

On Sept. 12, the Wall Street Journal reported that "Democrats in California have been leading this effort as usual, though more than a dozen states, including Colorado and Rhode Island, have either passed or are moving such destructive bills." In a belt and suspenders approach, last May, the U.S. Department of Labor issued a regulatory "information request" that may be the harbinger of ERISA "reform."

The DOL document is not shy about its intent either. "It has been suggested that some employers with healthier employees may self-insure and purchase stop-loss insurance policies with relatively low attachment points to avoid being subject to requirements while exposing themselves to little risk." Clear enough?

Despite some of the more over-the-top rhetoric, self-insured plans are still regulated to some extent by PPACA provisions. According to Julian Lago, senior client advisor at Celedinas Insurance Group and a regional vice president with the National Association of Health Underwriters, "There are definite advantages for employers to explore with self-funded plans — in particular with employers with fewer than 100 employees who might not have considered this in the past." But Lago cautions, "There are still premium taxes and employer notification requirements." And these plans "are not in a total PPACA bubble."

Time will tell whether this state and federal attempt to tamp down marketplace "leakage" attributable to self-funding is successful. In the broader context, it is increasingly clear that some interest groups, states and even the DOL view "greater competition" — what the president called for — as two wolves and one sheep discussing what to have for dinner.

See also:

• Swinging in the middle
• Dead horse strategies
• Once more unto the soup?