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The Affordable Care Act and Self-Insurance for Small Employers

As employers begin to feel the impact of the Patient Protection and Affordable Care Act (“ACA”) on their health benefit costs, many small employers (100 or fewer employees) are searching for ways to avoid the shared responsibility penalty by providing affordable coverage for employees. Early efforts to contain costs focused on the thirty (30) hour per week definition of a full time employee. However, small employers have discovered that although scheduling changes may reduce the number of full time employees to whom coverage must be offered, the group insurance premium rates have risen dramatically in response to ACA requirements.

Why are small employers feeling such a negative impact? For plan years beginning on or after January 1, 2014, health insurers offering coverage in the individual or small group market must offer coverage that includes “essential health benefits” (“EHB”). EHB includes ten (10) categories of benefits that must be included in the individual and small group policies: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorders; prescription drugs; rehabilitation and habilitation services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services. The EHB package is the minimum available to the small employer and accounts for some of the ACA sticker shock.

Does self-insuring offer the small employer any relief? Small employers can avoid the ACA’s requirement to provide EHB through self-insurance. Small employers, who are applicable large employers (fifty (50) or more full time and/or full time equivalent employees during the prior calendar year), are subject to the shared responsibility penalty for: a) failing to offer “minimum essential coverage” to substantially all full time employees (and their dependents) or b) failing to offer “affordable” coverage that provides “minimum value,” therefore qualifying an employee to receive a credit to purchase coverage on an exchange. “Affordable” coverage means that the employee’s cost of coverage does not exceed 9.5% of household income. Employers may use W-2 box 1 income, rate of pay or salary, or the federal poverty line as a safe harbor measure of household income. “Minimum value” means the plan’s share of the total allowed costs of benefits is no less than sixty percent (60%). “Minimum essential coverage” is broadly defined and includes most employer provided group health coverage. It does not include the following types of coverage: accidental death or dismemberment, disability, auto, workers compensation, limited scope dental or vision, specified disease (e.g. cancer only benefit) and Medicare supplemental.

A self-insured employer may generally determine its own scope of medical and health benefit coverage which does not have to rise to the EHB standard. This is a primary source of the savings anticipated from self-insuring.

What other factors should a small employer consider? Prior to the ACA, small employers with fully insured plans were not subject to nondiscrimination rules. However, the ACA mandates nondiscrimination rules for insured plans that are similar to the nondiscrimination rules applicable to self-insured plans. Insurers are developing self-insured options for employers with as few as ten (10) employees so the self-insured option is becoming more readily available. Employers need to consider the demographics and claims history of the employee population. A younger, healthier workforce could forecast self-insured savings; but an aging employee population may forecast higher self-insured costs. Additional costs associated with self-insuring include the cost of a third party administrator to deal with claims and payments. To avoid the risk of catastrophically high costs for which the self-insured employer is liable, stop-loss insurance is critical.

How can a small employer investigate this option in more detail? Consult with your benefits professionals to analyze your employee demographics, claims history, administration and stop-loss coverage options to understand the costs, risks and administrative burdens. For most employers, especially small employers for whom self-insuring has not traditionally been a viable option, this would be a major change, and it is not one to undertake without significant due diligence and advance planning.

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