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Will Small Employers move to self-funding as a result
of the Patient Protection and Affordable Care Act?
Don V. Barbuto,
Partner at Centurion Benefits,
Division of Centurion Group, LLC
In 2014, the modified community rating provision of The Patient Protection and
Affordable Care Act (PPACA) stated that health risk is not allowed to be calculated into the
rates for employer groups with fewer than 100 employees. This new modified community rating
requirement will eliminate the use of actual claims experience and minimize the amount an
insurer can vary its rate development process. Rates are typically based on age, tobacco use,
family composition and geographic location.
What this means, from an employer's perspective, is that groups that have unfavorable
demographics and poor claims experience will receive more favorable rates. Conversely, groups
that have good claims experience and better demographics will be rated up and not benefit as
they previously had from the healthy habits of their employees, which lowered their premium
rates.
For example, if a healthy group has a 0.7 risk factor, it could rise to a 1.0 risk factor,
representing a 30 percent increase in premium rates. When you add in a 10 percent trend
increase, groups could be looking at an overall 40 percent rise. If employers with healthy
employees opt for self-insurance and leave the community-rated pool, this could cause adverse
selection, resulting in increased rates for the employers remaining in the pool.
Centurion Benefits © 2016
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Because healthcare reform is reducing competition in the market place, an environment
of rising healthcare costs is being fostered. Also, the MLR regulations and the threat of insurers
paying rebates for not hitting the prescribed loss ratios will result in more conservative
underwriting practices. Finally, the modified community rating will benefit some and not others.
Since reinsurance carriers are not bound by loss ratios or modified community ratings,
employers with healthy employee demographics that shift from a fully insured medical plan to a
self-funded plan can out- perform their cost position and have more plan design flexibility.
Based on the current PPACA regulations, the consultants at Centurion Benefits believe
more small employers will explore self-funding as an option. Consideration of your
organization’s demographics, risk tolerance and goals for self-funding is a necessary step that
will ultimately determine if this type of funding is a viable option to stem the tide of healthcare
reform.
Centurion Benefits’ consultants are prepared to help you
evaluate your organization’s current funding model and
guide you through any decisions that could benefit your
organization’s bottom line.
Send an email to [email protected] or call
our office at 610-834-0401 x 112 with any questions you
may have.
Centurion Benefits © 2016