Because many small and midsize employers are turning to self-funding to control rising health costs, lawmakers in at least four states are considering legislation to dissuade employers from “opting out” of the commercial health insurance market.

Lawmakers in California, Rhode Island, Minnesota and Utah introduced legislation this year that would make self-funding less attractive by restricting sales of stop-loss insurance, a form of excess coverage that provides a financial backstop from catastrophic claims.

Though Minnesota's bill was withdrawn in response to objections by local business groups, lawmakers are introducing similar legislation elsewhere.

The proposed laws in California, Rhode Island and Minnesota would preclude medical stop-loss insurers from selling policies to self-insured employers with specific deductibles less than $60,000. While most large employers wouldn't even blink at that deductible, requiring a 50- or 100-employee company to pay the first $60,000 in medical claims for each plan member could be disastrous. The Utah bill is less onerous, setting the minimum specific deductible at $10,000.

Because employers have been able to purchase medical stop-loss coverage with fairly low deductibles, the percentage of self-funded employers with less than 100 employees has grown more to 2.3% in 2012 from 1.5% in 2010, according to a recent survey by United Benefits Advisors L.L.C., an Indianapolis-based alliance of 140 independent benefits advisory firms. As such, 85% of self-funded employers with less than 100 employees buy specific stop-loss coverage, compared with just 68% of self-insured employers with 2,500 or more employees. The survey did not ask what deductible levels were purchased.

Fortunately, some smaller and midsize employers have discovered a way around such restrictions. By banding together to form medical stop-loss captives, they can buy stop-loss coverage as a group with larger deductibles while keeping their individual stop-loss deductibles at comfortable levels. As a result, the medical stop-loss captive market is booming and now includes more than 40 facilities domiciled offshore and in the United States.

This growth could be short-lived if the Obama administration is successful in establishing regulations to discourage small and midsize employers from self-funding, a practice it perceives as attempting to circumvent the Patient Protection and Affordable Care Act. “This practice, if widespread, could worsen the risk pool and increase premiums in the fully insured small group market,” the administration said in a recent notice in the Federal Register.

The Self-Insurance Institute of America is advocating for the right to self-fund, but it needs support from the self-funded community to educate lawmakers that self-funding health benefits is not dodging health care reform. Rather, it is a viable cost-containment strategy that will enable more employers to afford to offer health benefits to their employees without dumping them on the fully insured market.