One way that employers seek to control health plan costs is by
self-insuring the plan. By self-insuring, an employer pays only the
cost of claims plus an administrative fee to a third party
administrator. An employer can insure against the risk of
catastrophic claims by purchasing stop loss insurance. An added
benefit is that self-insured plans are exempt from most State
insurance laws, such as laws mandating that certain benefits be
covered. This gives an employer with a self-insured plan more
flexibility to design the health plan to control costs and meet the
needs of its employees. Although traditionally only large employers
have self-insured their health plans, news reports indicate that
more small employers may be considering the self-funding
On May 1, 2012, the Departments of Labor, Treasury, and Health
and Human Services issued a Request for Information Regarding Stop
Loss Insurance, in which the Departments asked a series of
questions about stop loss insurance for health insurance plans.
Stop loss insurance allows an employer to self-insure for a fixed
amount of claims, with stop loss insurance covering the remainder
of the clams that exceed the fixed amount, called the
Under the principles of ERISA preemption, employers and health
plans that purchase stop loss insurance generally are not subject
to State insurance laws including mandated benefit laws, rating
policies, and other State and Federal consumer protections
applicable to health insurance, including some of the patient
protections under the Patient Protection and Affordable Care Act
("Affordable Care Act"). Some experts have suggested that
certain small employers (particularly those with healthy employee
populations) may choose to self-insure and purchase stop loss
insurance policies with relatively low attachment points to avoid
being subject to these requirements while exposing themselves to
little risk. For example, if the attachment point were set at
$5,000 per employee or $100,000 for a group, a small employer would
be assuming a low degree of risk and yet exempting itself from
State insurance regulation. If a large number of employers were to
follow this path, it could worsen the risk pool and increase
premiums in the fully insured small group market, including in the
Small Business Health Options Program (SHOP) Exchanges that will be
available on January 1, 2014. In other words, adverse selection
could threaten the financial stability and ongoing viability of the
small group market and the SHOP Exchange.
According to the Request for Information, the Departments have
little data on the incidence or terms of stop loss insurance among
self-insured employer group health plans, and are soliciting
comments (due by July 2, 2012) that will contribute to the
Departments' understanding of the current and emerging market
for stop loss products. After reviewing the comments, further
regulations could be issued if the Departments determine that a
trend toward self-insuring by small employers could threaten the
small group market and/or the SHOP Exchange.
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