BY DAVID BOTTOMS, REBC, RHU, CLU, CHFC
SENIOR VICE PRESIDENT, BENEFITS
As premiums for fully-insured small group medical coverage continue to increase due to the Affordable Care Act’s community rating rules, small business owners looking for competitively priced alternative approaches to health care coverage owe it to themselves to explore “level funded plans” based on a self-funded coverage platform.
In short, the ACA rules pertaining to coverage and pricing in the small group market are distinctly different for plans on a fully-insured contract platform and those on a self-funded contract platform.
Prior to the passage of the ACA, small employers almost exclusively utilized fully-insured plans due to the fact that self-funded plans traditionally had features that played more to the needs of larger employers with lots of employees and, as a result, less claim volatility than would be expected for a small employer with a smaller, more volatile risk pool.
Following the passage of the ACA, the insurance market got creative and realized that it had the ability under the law to develop a new product category, based on a self-funded contract platform, that could provide the security of a fully-insured plan while also providing pricing to clients commensurate with the risk they present. This new generation of small group self-funded plans are not hamstrung by ACA’s community rating rules, even if they are built to look and feel an awful lot like fully-insured plans.
Take, for example, an employer with somewhere between 10 and 49 employees. When a broker on behalf of the employer solicits proposals from the health insurers in the market on their behalf, all the major carriers, including UnitedHealthcare, Blue Cross Blue Shield, Humana, Aetna, and Cigna now have two primary ways they can price the group…as either “fully-insured” or “level-funded.”
Under the fully-insured approach, the insurers are, as a result of rules promulgated by the ACA, forbidden to assess the health condition of the group. Rather, the insurer must base its pricing on ACA’s “community rating” rules.
This approach will be appealing to groups with older and sicker employee populations given that the carrier has to provide pricing that is blind to the health conditions in the group and compliant with the age-rating rules which restrict the carrier’s ability to price in actuarially justified rate discounts for younger enrollees relative to older enrollees. In short, younger, healthier groups pay more than they should while older, sicker groups pay less than they should.
On the other hand, when the same carrier provides a proposal to the exact same group on their “level funded” platform, they are able to look at the specific health details within the group. This means that groups with better than average health see significantly reduced premiums while also often benefiting from enhanced plan designs and the potential for a refund or credit in the event that claims run better than expected. For healthy groups it is not uncommon to see a 20 – 30% difference between the fully-insured and level funded pricing from the same carrier, for the same group, and with a similar plan design.
As you can imagine, what is quickly developing is a bifurcated set of risk pools. As healthier groups are beginning to realize they have access to a new, more attractive option, they are leaving the fully-insured risk pool. This means that the risk characteristics in the fully-insured risk pool will over time continue to deteriorate leading to ever more significant rate increases.
On the other hand, those groups that move to level-funded plans are able to get credit for the risk they actually constitute to the insurer while having the assurance that, if the health status within their group gets worse in the years to come, thanks to ACA, they can move back, no health questions asked, into the fully-insured risk pool.