As provisions of federal health care reform continue to take effect following the landmark US Supreme Court decision largely upholding the Patient Protection and Affordable Care Act (the "ACA"), employers are looking for ways to cut costs. Faced with mandates to offer richer benefits with less cost-sharing, small and mid-sized employers in particular are increasingly considering self-insuring. Then, to mitigate the financial exposure of self-funding, such employers may purchase stop-loss policies that provide coverage above a certain threshold at both the specific insured level and in the aggregate.

Certain regulators have taken the position that permitting smaller employers to self-insure then purchase stop-loss coverage permits an "end run" around the intention of the ACA market reforms. They argue that such employers avoid the market reforms by self-insuring, but then purchase stop-loss with attachments points low enough that it minimizes the employer's financial risk to a degree that effectively mirrors the effect of health insurance but without the market reforms. To combat the perceived abuse of the system, some regulators have introduced legislation that would raise the minimum stop-loss attachment points.

Below is a brief overview of the ACA market reforms, the current landscape, and recent and proposed legislation aimed at this evolving stop-loss issue.

Background: ACA Market Reforms

Coverage With Market Reforms Must be Offered by Employers Under the ACA

On March 23, 2010, President Obama signed the ACA, which enacted comprehensive reform of the private health insurance marketplace in all U.S. states and the District of Columbia (the "Market Reforms"). On June 28, 2012, the U.S. Supreme Court upheld the validity of all aspects of the ACA that are relevant to the issues of employer self insurance and stop-loss coverage. The ACA applies to a group health plan (generally, an employer-sponsored plan) and a health insurance issuer offering group or individual health insurance coverage. Self-funded (self-insured) employer plans are exempt from many of the market reforms required by the ACA, though certain provisions do apply (for example, prohibitions on lifetime and annual limits).

Market Reforms that take effect before 2014 for fully-insured but not self-insured plans include medical loss ratio ("MLR") provisions and annual rate review. Additional Market Reforms effective as of 2014 for fully-insured but not self-insured plans include mandatory coverage for essential health benefits, adjusted community rating rules, and guaranteed issue and renewability requirements.

The cost of this coverage for employers estimated by some observers to be approximately $500 per year per employee, with an overall cost of approximately a trillion dollars according to some estimates. Others have estimated that the market reforms with result in an increase of 5-15% over current costs to employers. In any event, the general consensus is that the market reforms will either increase the costs of providing health care to employees or encourage employers to consider alternative means of either complying with or being exempted from the ACA requirements.

Tax Penalty for Non-Compliance as of 2014

The ACA does not expressly require that an employer offer employees health insurance that complies with all of the Market Reforms, but large employers (with at least 50 full-time equivalent employees) will be subject to penalties as of 2014 if one or more of their full-time employees obtains a premium credit through an exchange (i.e., if the employer does not provide health coverage to its employees). See Congressional Research Service "Summary of Potential Employer Penalties Under PPACA" by Hinda Chaikind and Chris L. Peterson (June 2, 2010). Employers with 50 to approximately 100 employees, although classified as "large employers" for purposes of the penalty, often in reality more closely resemble small employers in terms of their ability (or inability) to afford the health insurance premiums for coverage that includes the ACA mandated coverages. As a result, this mid-size market is increasingly considering self-insurance as a more affordable alternative to provide coverage to employees. Because employers that self-insure purchase stop-loss insurance to limit their financial exposure, this shift towards self-insuring in the mid-sized employer market appeared to be a market opportunity for stop-loss carriers.

The Issue: Regulators Perceive a Loophole

Regulators have begun focusing on stop-loss insurance, however, concerned that employers moving from insured to self-insured plans may be using stop-loss with low attachment points as a way to avoid offering an ACA-compliant plan. In particular, employers may self-insure to avoid having to comply with certain ACA provisions and to save money. The employer would then purchase stop-loss insurance to mitigate its financial exposure. Thus the employer would avoid having to offer an ACA-compliant plan but would still have limited its financial exposure—a scenario that some regulators view as a "loophole" around the ACA.

On May 1, 2012, the Department of Health and Human Services ("HHS"), along with the Department of the Treasury and the Department of Labor (each a "Regulator" and collectively, the "Regulators"), issued a Request for Information Regarding Stop Loss Insurance (the "RFI"). The stated goal of the RFI was to gather information regarding the use of stop-loss by group health plans and their sponsors "with a focus on the prevalence and consequences of stop-loss insurance at low attachment points."

Regulatory Responses, History Repeating?

The issue raised now with respect to this ACA "loophole" mirrors a similar concern from the mid-1990s in which the National Association of Insurance Commissioners (the "NAIC") and state regulators tackled the issue of stop-loss policies with low attachment points being used as a "subterfuge" by self-insured plans to avoid state insurance regulation. See Proceedings of the NAIC, 1994 Proc. 3rd Quarter 650 and 1994 Proc. 4th Quarter 765. (One regulator reportedly offered an anecdote of stop-loss filings where the attachment point was as low as $250 per year. Proceedings of the NAIC, 1994 Proc. 3rd Quarter 642.)

As a result, the NAIC adopted Model Act 92, the Stop Loss Insurance Act, establishing minimum attachment points to maintain stop-loss status as opposed to health insurance status. Stop-loss policies with lower attachment points would be regulated as health insurance under state law. (The minimum attachment points are $20,000 per individual claim and vary for aggregate claims, typically around 110 or 120 percent of expected claims depending on the size of the employer.) Some version of Model 92 has been adopted or addressed in fifteen states, but the majority of states have not set minimum attachment points for stop-loss insurance.

As described in the RFI, an employer could, in theory and unless prohibited by state law, purchase stop-loss with attachment points so low that the stop-loss carrier would be assuming almost all of the insurance risk. The example provided in the RFI describes attachment points of $5,000 per employee or $100,000 for a small group in a state that does not regulate minimum stop-loss attachment points. At that point, although the employer has arguably off-loaded nearly all of the financial exposure tied to the insurance risk to a degree similar to a health insurance policy, its employees would not receive the patient protections required under the ACA because neither the employer nor the stop-loss carrier would be subject to the ACA.

Now, the NAIC and state regulators are revisiting stop-loss provisions in light of this most recent shift in the stop-loss market.

Changing the Risk Pool

In addition to the issue of attachment points, regulators are concerned about the impact on the risk pool of the migration from insured to self-insured coverage.

In the face of the ACA market reforms, it may very well become increasingly attractive for smaller businesses employing younger (healthier) employees to self-insure. These employers could save money by paying claims rather than high premiums for insured coverage and could limit financial risk with robust stop-loss coverage. But, to the extent that a healthier segment of the population leaves the insured market, the risk pool for the insured market will become less healthy. Specifically, the average per person claims for the insured market could increase and, as a result, health insurance premiums would rise.

Action in the Current Climate

Since July 2, 2012, having been passed in the Senate, California Senate Bill 1431 (SB 1431) remains pending in the Assembly Committee on Health. As initially proposed, SB 1431 would have raised the minimum attachment point for small employers (2 to 50 employees) to $95,000 per individual claim and the aggregate to the greater of 120 percent of expected claims or $19,000 times the total number of employees and dependents. As the bill makes its way through the legislative process, the exact attachment point levels are being revised. Nonetheless, the intent appears to be to raise minimum attachment points to a level that would dissuade small and medium sized employers from self insuring, because they could rely on stop-loss to a far lesser extent to limit financial exposure. The bill would also require stop-loss coverage for all employees and dependents of the small employer it insures (which appears to confuse direct health insurance coverage, which is provided to individuals, with stop-loss coverage, which is provided to the employer not the employees or dependents), without regard to health status, and, with limited exceptions, would make the stop-loss coverage guaranteed renewable at the option of the small employer. In commending the Senate for passing the legislation, California Insurance Commissioner Dave Jones stated that the legislation would "protect California's small employers and their employees as federal health care reform goes into effect," underscoring regulators' perception that permitting low attachment points would provide employers a loophole around the ACA requirements.

Taking a slightly different approach, Delaware recently amended Section 7218(e) of the Delaware Insurance Code to prohibit a small employer health insurance carrier from providing any stop-loss policy to a small employer of 15 or fewer employees (subject to certain qualifications). See 2011 Del. ALS 25; 78 Del. Laws 25; 2011 Del. HB 28.

In a similar action, bearing on the issue of the changing risk pool, the New Jersey Department of Banking and Insurance recently issued a bulletin in which it announced its intention to promulgate regulations "to prohibit the consideration of health status in the offering or pricing of stop-loss insurance offered to small employers." "Selective Marketing Of Stop Loss Coverage," Bulletin No. 11-20 (October 3, 2011). According to the bulletin, the regulations will be aimed at the recent trend of stop-loss carriers marketing their policies to small employers on the basis of health history and denying coverage to employers based on employee health status, a practice that reportedly had the effect of driving up premiums in the guaranteed issue market.

The NAIC will reportedly also be updating stop-loss attachment points to reflect more recent experience, as the current attachment points were based on a study conducted in 1995. See "NAIC Panel Eyes Stop-Loss" by Allison Bell (March 7, 2012).


Carriers of both health insurance and stop-loss insurance, small and mid-sized employers, and regulators across the country are watching this issue closely.

One hand, state regulators tasked with enforcing the ACA appear to believe it is their duty to shut down the perceived stop-loss loophole for small and mid-sized employers.

On the other hand, small and mid-sized businesses must be able to provide coverage they can afford.

So, as always, the questions remain: Who will bear the costs of the ACA reforms, and how can insurers and employers safeguard the ability to use stop-loss coverage to rationally mitigate risk?