Earlier this year, I described why there will be significant and true rate shock stories this fall as community underwriting will go into effect for almost all fully insured small group plans:
PPACA is changing the means of how groups are underwritten for non-grandfathered policies that went into effect on or after January 1, 2014. The new policies are underwritten based on a modified community rating system that allows for consideration of the age of people in the underwritten group, their locations (which can still tie a lot of statistical probabilities of cost and health status) and smoking status. The community that they are rated against is the entire pool of small groups that an insurance company insures….
Right now under experience and/or statistical underwriting, there are significant premium differentials between groups with members who are the same age, location and smoking status. This system has its own set of entrenched winners and losers… Statistical and experience underwriting gives better rates to groups that historically have lower health care costs. Those groups tend to have more men then women, and fewer than typical number and severity of pre-exisiting conditions for each age cohort. Conversely, groups that have more women than men and have greater than expected number of people with expensive conditions, tend to get much higher rates than average and median….
On average, the total cost of premiums to insure the same people in the same groups with experience or statistical underwriting versus community underwriting will be the same. However the distribution of those costs will be wildly different. Groups that are more male and/or healthier in general will see significant rate increases due to underwriting changes. Groups that are more female or statistically likely to be sicker than average will see flat rates or decreases.
The change in underwriting assumptions for the small group market only applies to companies that are “fully insured.” Fully insured is a term of art. It means the insurance company collects a premium and takes on all of the risk of claim expenses being higher than projected. If a group of three people have two of the three covered lives go to the trauma center in a benefit year, the insurance company eats a massive loss on the group. That loss should be covered by the thousands of other covered lives in other small groups. If that same group has a total of seven claims for the entire year totalling $800 and that $800 is entirely deductible dollars, the company will have given the insurance company a massive check for peace of mind only. There would be no refund.
There is a loophole for companies that think they want to take on additional risk to reduce their premiums.
The alternative system is to buy an administrative services only (ASO) contract with an insurance company. An ASO arrangement has the insurance company handle the back-end work (pay claims, print ID cards, create provider networks etc) for a fixed fee every month. However, the insurance company does not provide any insurance. The group takes on the risk of paying all the claims.
ASO arrangements are super-common with large groups (more than 500 covered lives) as those groups have enough numbers for statistical smoothing to come into play. Medium size groups (50 to 499 covered lives) can do ASO but outliers are more common. Small group ASOs are offered but they are niche products.
That may be changing for some small companies. I know one regional company is considering offering a small group ASO for at least five covered lives. That is a miniscule risk pool. The target market is for young, healthy and overwhelmingly male companies to opt out of community rating by going to a self-insured model. This will create a bit of rate pressure on the rest of the small group market which would be community rated as the young invincibles aren’t there to cover outlier expenses.
There is significant risk for a company of dozen covered lives to go the ASO route. First, it is an administrative headache to actually pay claims and set up rules for what things are covered. Secondly, it places a small company at significant risk for a half million dollar claim. There is a way to mitigate that risk. Reinsurance and stop-loss insurance can be used to chop off tail end risk.
The other type of reinsurance is between companies that self-insure (pay all the costs of employee medical care)… The self-insured company will often buy a form of insurance called “stop-loss” that is effectively reinsurance where the stop-loss seller will pick up the very high dollar claims.
ASO plus stop-loss is effectively a company wide massive deductible plan. ASO works really nicely when claims for a population are below expectations. It runs into trouble when trouble happens. Big companies use their big risk pools to cover trouble. Small companies have to reinsure and even then there is a possibility of trouble.
The key question is where and how the company wide deductible is set. Typically it is at the individual member level. The attachment point (a term of art) is where the stop-loss insurance comes into play. For medium and large groups, the attachment point per member is $50,000 to $75,000 in contracted rate claims on average. Smaller groups tend to have lower attachment points on a per covered life basis. Some states regulate a minimum attachment point fo $40,000 or more which could put a group of dozen members on the hook for $200,000 in expenses if a covered family of five is in a nasty car accident involving dust-offs and trauma care. Stop-loss is supposed to eat the tail risk. Large groups have enough members where tail risk is minimal and the group can absorb a few moderately expensive claims.
The question is could my mechanic and his seven employees cover even a stop-lossed outlier expense of $75,000 if they self-insured and had two claims go to the stop-loss limit?
I don’t think they could as they have enough trouble keeping enough cash to pay for a reasonable inventory of common spare parts. At that point, we’ll see stories about how Marty’s Mechanics went bankrupt because of Obamacare as they tried to dodge the question of actually providing effective but more expensive insurance for their employees by going the ASO route instead of the fully insured route.