Obamacare's New High Risk Pool

Anticipation of huge premium increases in the small employer market has been building since 2013. New rules were to take effect on January 1, 2014 that would eliminate medical underwriting and reduce the number of criteria insurers could use in developing premiums. Insurance professionals, insurers, and organizations such as the U.S. Chamber of Commerce were preparing businesses with less than 50 employees for significant increases to their medical insurance premiums and the potential of losing their plans.

Realizing the potential catastrophe of fully implementing this rule, President Obama had his leaders at HHS issue a letter to state insurance commissioners offering to extend plans that existed prior to October 1, 2013 through 2014. Less than four months later HHS followed up their prior letter with an additional extension lasting through 2017.

The delay has benefited employers and bought insurers time. This has resulted in a series of new plan designs featuring alternative funding arrangements that will help small employers avoid the costly rules associated with ACA compliant plans.

These products include self-funding with lower stop loss deductibles, level funded plans, and Multiple Employer Welfare Arrangements (MEWA). Most of these arrangements aren't new. They have simply been modified or adjusted to meet the needs and budgets that small employers need to retain a solid benefits offering at an affordable cost.

The biggest difference between ACA compliant fully insured plans and all of these options is medical underwriting. Under Obamacare, all fully insured plans for small employers must use adjusted community rating on their policies. The rules of adjusted community rating only allow for insurers to offer different rates for age, location, and tobacco use. Essentially taking the greatest risk factor - medical history - out of the process. The result is ACA regulated plans will increase the cost to employers with healthy employees while limiting the costs to employers with unhealthy employees.

On the other hand, alternative funding arrangements can continue to use medical underwriting to develop rates for employers allowing those with healthy employees to reap the benefits of a lower premium.

With Obamacare's rules on guaranteed issue and no pre-existing conditions, small employers will be able to shift from one arrangement to another based on their employees health risk. This will result in a separation of good and bad. Alternative funding arrangements will be filled with healthy risk and ACA fully insured plans will become a dumping ground full of bad health risk creating a costly high risk pool.

From an employer perspective this gives them the best of both worlds. At least until insurers pull out of the high risk market.