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Self-funded health plans under attack in New Jersey

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TRENTON, N.J.—Advocates of self-funding health benefits are fighting an attempt by New Jersey regulators to crack down on the practice among small businesses, saying it is part of a broader attack on self-insurance at the state and national levels.

In an Oct. 25 letter to Thomas Considine, commissioner of the New Jersey Department of Banking and Insurance, the Self-Insurance Institute of America Inc. asked the department to rescind a bulletin it issued this month that alleges stop-loss insurers are “cherry-picking” employer groups with good claims experience.

The Oct. 3 bulletin alleges that the insurers, which write excess coverage for self-funded group benefit plans, are “selectively marketing coverage to small employers on the basis of health history of that employer's employees, and denying coverage to employers based on employee health status. The result of this selective underwriting is to "cherry-pick' groups less likely to incur claims, leaving the groups more likely to incur claims to the state's guaranteed-issue insured market. This, in turn, drives premiums up for small employers purchasing insured plans.”

Because stop-loss insurance is excluded from the state's definition of a health benefit plan, it is not subject to the same regulations as fully insured health coverage, the bulletin states. Therefore, the department has invoked New Jersey's unfair trade practice law, asserting that “the selective marketing and underwriting described herein constitutes an unfair trade practice.”

Simpsonville, S.C.-based SIIA asserts that the department's contention is “inflammatory and without merit. Stop-loss insurance is a completely different product than commercial health insurance, so it is misguided to conclude that "unfair competition' exists,” SIIA said in its letter.

SIIA also suggested that any attempt to restrict self-funding actually would result in higher health care costs for New Jersey employers because the commercial market is “largely monopolistic” because it is controlled by a handful of health insurers.

SIIA also has filed an Open Public Records Act request to obtain the documentation New Jersey regulators are using to conclude that stop-loss insurers have engaged in unfair trade practices.

Mike Ferguson, SIIA's chief operating officer, said New Jersey's action is part of a larger effort at the state and federal levels to prohibit benefits self-funding by employers that would be eligible to purchase coverage through insurance exchanges that will be set up eventually under the federal Patient Protection and Affordable Care Act.

“It's an entirely new line of attack on self-insurance,” Mr. Ferguson said. “There is concern that growth of the small-employer self-insured marketplace will contribute to adverse selection in the group health care marketplace, particularly when the exchanges come online in 2014.”

The National Assn. of Insurance Commissioners “is very much focused on this. What they've been looking at is restricting stop-loss in various ways, perhaps by restricting the sale to smaller groups altogether or by restricting terms, making attachment points higher,” Mr. Ferguson said.

A committee of the Kansas City, Mo.-based NAIC is considering a formal recommendation that it adopt a model act discouraging self-insurance among smaller employers by either prohibiting the sale of stop-loss insurance to small groups or by setting minimum specific stop-loss deductibles, which limit an employer's exposure to a single catastrophic claim, at $40,000, and aggregate attachment points, which protect against excessively high claims for the entire plan, at 120% of expected claim costs.

The Employee Retirement Income Security Act's “regulatory exemption for self-insured (self-funded) plans is a persistent thorn in the side of state insurance regulators,” according to a September statement by Timothy Stoltzfus Jost, a law professor from Washington and Lee University School of Law in Lexington, Va., to the NAIC's ERISA (B) Subgroup.

“This may be acceptable for large employer groups, which have the bargaining power and expertise to protect their employees. But when small-employer packages purchase "self-insured' packages from insurers, including stop-loss coverage with very low attachment points and administrative services, they are essentially purchasing conventional health insurance, except that it is free from state regulation,” Mr. Jost said.

Moreover, he said “insurers have always had an incentive to market "self-insurance' to healthy groups, and small businesses with healthy enrollees have always had an incentive to purchase it. The Affordable Care Act, however, increases these incentives...Insurers understand this and are very actively marketing "self-insured' products to small groups.”

A spokesman for the NAIC confirmed that the organization is looking at stop-loss issues.

Although most large employers self-insure their health benefits, there is no prohibition under federal law barring small employers from self-funding, benefits experts said (see related story).

According to a spokesman for the New Jersey agency, the stop-loss issue came to the state's attention after it received “reports that some writers of stop-loss coverage were selectively marketing coverage to small employers based on employee health status.” He defined small employers as those with up to 50 employees that are eligible to purchase coverage through the state's Small Employer Health Benefits Program, which was established under reforms passed in 1994.

Insurers that sell health plans via New Jersey's small-employer program must cover all employers regardless of their health status, but insurers are allowed to impose waiting periods on individual plan members with pre-existing conditions, the department spokesman said. The plans also are subject to minimum coverage requirements set by the state, he added.

“There are a number of stop-loss insurers that have been sniffing at that small-group market,” said Robert Melillo, national vp of risk financing solutions at USI Insurance Services L.L.C. in Meriden, Conn.

“Self-funding is definitely coming downmarket,” said Craig Hasday, president of Frenkel Benefits L.L.C. in New York.

But to price stop-loss coverage, insurers typically medically underwrite it based on information collected from past claims or, when that is not available, on medical questionnaires completed by employees, benefits experts said.

The process is similar to an employer seeking a quote from a health insurer, said Ken Olson, division president of The Horton Group Inc., a broker based in Orland Park, Ill. “If an employer wants to shop their group health insurance, they fill out the medical questions application and then a rate comes back from the competing carrier,” he said. “Why is that different than shopping for stop-loss coverage?”

David Wilson, a partner at insurance industry consultant Windsor Strategy Partners L.L.C. in Princeton Junction, N.J., said the state is erroneously targeting stop-loss insurers when the decision whether to self-insure ultimately rests with the employer.

“The department is hanging it on the stop-loss carriers. That's an unfair stretch,” Mr. Wilson said. “Any employer that decides to self-insure, regardless of their size, does it because it's a cheaper option and they have more control.”

The New Jersey Department of Banking and Insurance spokesman said the state will take administrative action against any insurers it determines are cherry-picking employers, but would not describe potential sanctions.

In the meantime, the department's statement said it intends to promulgate regulations “in the near future” to prohibit the consideration of health status in the offering or pricing of stop-loss insurance offered to employers with 50 or fewer employees.

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