Thursday, March 29, 2012

Nate vs Chad: Entering the Ring

[Regular readers may recognize Nate Ogden as a frequent commenter and occasional guest-blogger here at InsureBlog. Well, it's our pleasure today to welcome Nate on board as a full-fledged Contributor. Nate's a Third Party Administrator in Northeast Ohio, and brings a very unique perspective to the whole insurance and risk-management business. In his debut post, Nate corrects the MSM on the subject of how self-funded plans are taxed. Welcome aboard, Nate! HGS]

Writing in the LA Times, Chad Terhune offers up his take on " a new type of self-insurance for small businesses with as few as 25 workers." While he does a better job than most media types (talk about a low bar), he still missed the mark. For one thing, this is not new at all. Some 15-20 years ago, there used to be a huge self-funded market for small groups. This is just a normal market cycle that repeats itself all the time. My family owns three TPAs(Third Party Administrators), we process the claims for self funded employers, and were based in Costa Mesa from 1980-2006. We had tons of 15 life, self-funded groups. There were carriers like Vasa Brougher that specialized in small group self funding.

For numerous reasons the market disappeared:

• Provider contracting favored the large carriers who did not rent their PPO networks. When you're self funded, you have to rent a PPO; generally, rental PPO's didn't have the deep discounts available to the "big boys." This was especially true in California until the Blues starting giving access to their PPOs 10 or so years ago.

• Poorly written COBRA laws made it extremely risky for small groups. Congress wrote the law, then left it up to the courts to interrupt the details. Large employers could afford a lawsuit while it put small employers out of business.

• The reinsurance market didn’t recognize the different needs of small employers compared to large ones, and thus the stop-loss policies didn’t provide all the protection small employers needed.

When we have these debates about health care reform and insurance it's important that the public be given accurate information. Small group self-funding is not some new concept just invented to circumvent State Regulation or PPACA reform. It has been around since the late 70's and early 80's. The failure of heavily regulated small group reform is just making it incredibly attractive right now. I would argue the reason you're seeing it more in California is that you have higher regulation there.

In most other States employers have been buying $5000+ deductible, fully insured plans, and then self-funding that deductible down. In California, most of the carriers worked hard to forbid this or to put enough restrictions on it to make it impossible.

Anyone arguing that self-funding only peels off the healthy risks has no idea what they are talking about. The vast majority of our business is groups that are moderately to very sick. Super healthy groups have premiums too low to make self-funding attractive. If everything works perfectly, they save a couple percent; if anything goes wrong, as it does on average once every five years, they pay considerably more. The groups flocking to self-funding are those that have been getting double digit rate increases year after year with no help from the carrier to fix the problem. Mr Terhune does mention getting claims data but doesn’t give it nearly as much discussion as it merits. Educating employees, often face to face, fighting with providers, finding waste and inefficiency is where the savings come from. Isn’t that what all groups should be looking to do?

Two more things: Mr Terhune is incorrect that self-funded groups don’t pay premium tax: they do, just on a smaller amount. This is one error the media always repeats and has for decades. Premium taxes apply to premiums (imagine that!), so the stop-loss premium is subject to them. For the most part, the claims paid by the employer are not subject to premium taxes (a handful of states have taxes based on claims).

Also, claiming that self-funded plans don’t contribute to the pools in PPACA is absolutely incorrect: self-funded plans have to pay the same per employee tax that fully insured plans do.

It sure would be nice to see the media care as much about accuracy as framing their message.
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