OLDWICK, N.J. — Businesses may increasingly turn to self-insurance, and their use of captives for medical stop-loss insurance may grow as a result of the U.S. health care reform law, some industry experts predict.

Bill Boone, national alternative health care solutions leader at Marsh Inc., said reform removed the lifetime limit and annual per insured limits in 2014 that previously prevailed in the market. "This has brought stop-loss insurers to the table to provide high excess limits that are now especially critical," Boone said. "One really bad case, and it could be $2 million bucks."

More clients are placing medical stop loss into their existing captives and "investigating the creation of new captives to do the same," said Boone. Many of the larger medical institutions have already implemented a captive for professional liability and general liability and physician medical liability for their employed physicians and sometimes for non-employed staff physicians, Boone said.

Matthew Buettgens, senior research associate at The Urban Institute, told Best's News Service if states don't change the current regulations, it's likely there will be more self-insurance, and more medical stop-loss captives.

According to an issue brief by The Commonwealth Fund in November 2012, authored by Buettgens and Linda Blumberg, the Patient Protection and Affordable Care Act changes the small-group insurance market substantially starting in 2014, but most changes don't apply to self-insured plans. This exemption provides an opening for small employers with healthier workers to avoid broader sharing of health care risk, isolating higher-cost groups in the fully insured private market, they wrote.

Small businesses that offer fully insured plans with favorable demographics or claims experience fear they will see steep premium jumps upon implementation of the ACA when buying through the insurance exchanges that come online in 2014, said Ryan Siemers, a principal at Aegis Risk.

Starting in 2014, the law mandates that employers with 50 or more employees that don't offer coverage to their employees pay $2,000 annually for each full-time employee over the first 30, as long as one of their employees receives a tax credit.

Siemers maintains the captive industry has been promoting placement of stop loss into captive arrangements for a while but stop loss is subject to high payouts that could be detrimental to a captive. Life or disability insurance, which are more consistent and less "sporadic," could be a better fit.

Private stop loss or reinsurance plans can mediate the risk of self-insurance for small employers, facilitating the decision to self insure, Buettgens and Blumburg wrote. "We simulate small-employer coverage decisions under the law and find that low-risk stop-loss policies lead to higher premiums in the fully insured small-group market," they wrote. "Average single premiums would be up to 25% higher, if stop-loss insurance with no additional risk to employers than fully insuring is allowed  an option available in most states absent further government action."

Captives for medical stop loss also could increase because stop-loss coverage at deductibles some smaller businesses would want would be too expensive, Siemers said. As an alternative, they may seek membership in a larger captive to put their catastrophic risk into at "potentially" a lower cost than market stop-loss premiums, Siemers said.

Generally, employers must have specific/individual stop-loss policies, designed for the claims of one covered individual in a group.

Consumer advocates contend very small employers will try to self-insure and use medical stop loss with low deductibles to avoid compliance with the law (Best's News Service, Aug. 29, 2012).

With employer-sponsored health benefits, fully insured and self-insured group plans are governed by the federal Employee Retirement Income Security Act of 1974, said Carmen Balber, director of the Washington D.C. office of Consumer Watchdog. However, self-insured plans don't have to comply with some of the
law's key consumer protection provisions, including the requirements for minimum essential health benefits, she said. A big concern is that small businesses will be using the exchanges, and self-insurance is being encouraged for businesses with the healthiest employees, Balber previously said, noting it's a way to "cherry pick the healthiest in the risk pool" (Best's News Service. Aug. 20, 2012).

About 25 states regulate medical stop loss in some way, and only three states have adopted the National Association of Insurance Commissioners' Stop Loss Insurance Model Act, said Mike Ferguson, chief operating officer of the Self Insurance Institute of America. Under the model act, the deductible is currently
at $25,000 for specific policies, Ferguson said. The NAIC is looking at revising the model act to raise the attachment points on both specific and aggregate policies.

An actuarial subgroup of the NAIC has recommended that stop-loss deductibles also known as "attachment points"  be set at a minium of $60,000 per insured individual, according to the Commonwealth Fund issue brief. The suggested parameters would expose small employers to significant financial risks if self-insuring and would dissuade the vast majority from doing so. "As a result…average premiums in the fully insured small group market would be lower than under a scenario with looser stop-loss regulations or none at all,"
Buettgens and Blumberg wrote.

With the latest proposed revision, brokers, captives or others may say they can offer an alternative lower than $60,000, for example, so some small businesses may put their catastrophic risk into a captive, potentially at a lower cost than the higher stop-loss premium, Siemers said. Currently, many medical stop-loss carriers aren't eager to write coverage at deductibles lower than $50,000, Siemers said.

If the NAIC and regulators don't stipulate a minimum stop-loss deductible limit, captive arrangements may flourish because small employers will observe the steep cost of stop-loss premium at low deductibles and seek alternative, potentially lower cost funding arrangements, Siemers said. Medical stop-loss captives are "a promising market growth opportunity for the self-insurance marketplace,"Ferguson said.

Health reform could potentially make it more attractive for smaller businesses to band together in a captive and get lower risk than a traditional stop-loss policy, said Buettgens, noting there could be "a disproportionate growth" in captives depending how states view a captive versus a traditional stop-loss
policy.

Some brokers say medical stop-loss captives are spurring interest from all size businesses. If health reform drives up costs, companies, regardless of size and with good loss experience, will want to self- insure, said Les Boughner, executive vice president and managing director of the captive practice at Willis. However, several group captives have already been formed for medical stop loss, and ERISA benefits must use a U.S. captive, Boughner said. These risks can be located anywhere in the United States but because it is a group captive, it would "probably be domiciled offshore," Boughner said.

According to America's Health Insurance Plans, starting in 2014, health reform requires health plans pay a sales tax on policies sold to individuals, families, small businesses and seniors. The tax begins at $8 billion in 2014 and rises to $14.3 billion in 2018. The Congressional Budget Office has said this tax will be passed along to individuals and small businesses via higher health insurance premiums (Best's News Service, Nov. 5, 2012).

Contact the author at: Fran Matso Lysiak, senior associate editor, BestWeek: [email protected]