Rising Premiums and Changing Market Dynamics Spur Small Firms' Interest in Self-Insurance

The Center for Studying Health Systems Change recently published an Issue Brief discussing the growing interest among smaller employers to self-insure. Large employers have historically chosen to self-insure and assume all financial risk for their employees' health care, but small employers often found it too risky to take on that liability. Large employers have used third-party administrators (TPAs) and stop-loss insurance policies to make self-insurance a viable option. As the Brief describes, increasingly competitive markets for stop-loss insurance and TPA services are making self-insurance attractive to more employers, particularly small firms with 100 or fewer workers. Some carriers now offer stop-loss coverage to firms with as few as 10 workers.

Self-insurance arrangements may offer advantages to small businesses—such as lower costs, exemption from most state insurance regulation and greater flexibility in benefit design—that are especially attractive to large firms with enough employees to spread risk adequately to avoid the financial fallout from potentially catastrophic medical costs of some employees, according to the study.

However, if more small firms opt to self-insure, certain health reform goals, such as strengthening consumer protections and making the small-group health insurance market more viable may be undermined, according to the study. A particular concern is adverse selection—attracting sicker-than-average people—in the state-based insurance exchanges created by reform and scheduled for implementation in 2014.