Why Smaller Employers Will Shift to Self-Funding; Who Wins and Loses


Affordable Care Act (ACA) provisions stand to increase smaller (≤ 100 employee) employers’ premium costs by 20 percent or more in 2014, before accounting for medical trend (+/- 6 pct)

The ACA provisions driving the premium increase for smaller employers (e.g. community rating, minimum essential benefits, excise tax on premiums) can be entirely avoided by shifting from fully-insured coverage to self-funding – self-funded plans are exempt from these ACA provisions.

We show that because of ACA, the average small employers’ cost of self-funding is on par with, or cheaper than, continuing with fully-insured coverage. For employers with healthier than average employees, self-funding may be far cheaper than fully-insured coverage; stop-loss premiums paid by self-funding employers can still vary according to the health of employees, where fully-insured premiums cannot

As an added motive, employers no longer face the risk of sharp increases in stop-loss premiums in a year following large self-funded claims – because they now have the option of reverting to the exchange for fully-insured, community-rated coverage if and when their employees’ claims rise

Roughly 40 pct of fully-insured commercial lives are sponsored by employers with ≤ 100 employees (Exhibit 4, pg. 4); we expect many of these lives will shift to self-funded plans. CVH is most negatively affected with more than 10 pct of members in small group risk plans; CI is least negatively affected with less than 0.1 pct of members in small group risk (Exhibit 5, pg. 5)
CI and UNH are best positioned to benefit from expansion of self-funding among smaller employers; both have relatively large shares of the ASO (administrative services only) service market for smaller employers (Exhibit 6, pg. 6), as well as the market for medical stop-loss insurance (Exhibit 7, pg. 7)

Taking all moving parts into account (decline in fully-insured, rise in ASO and stop-loss) CI is by far the best positioned and is a clear beneficiary (no meaningful small group risk exposure; strong presence in ASO and stop-loss); CVH is by far the least well positioned and stands to be negatively affected (relatively large exposure in small group risk; little or no exposure in ASO or medical stop-loss)

For our full research notes, please visit our published research site.

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