Tip Sheets

Employers use self-funded insurance to avoid ACA mandate

By Joseph Burns

Seeking to avoid the employer mandate of the Affordable Care Act, many small employers are pursuing self-funded health insurance. Under this strategy, employers set aside enough funds to insure themselves, eliminating the traditional health insurance although these employers still use traditional insurers or health plans to enroll employees, process claims and establish networks of providers.

Describing this strategy, one health care consultant said: “What you’ve got is basically a loophole for the small employer to get out of the ACA requirements.”

Large employers have long recognized the advantages of self insurance

For years, many of the nation’s largest employers have been self-insured for health care. This means the employers assume all the financial risk of providing health insurance and therefore pay all medical bills for employees and dependents. Employers have reinsurance for losses that exceed a certain threshold and in some states, must apply to be licensed as a health insurer under state law. In California, for example, the state Department of Managed Health Care reviews and approves licenses for self-insured employers.

A self-insured employer would contract with health plan to act as an administrator to enroll employees, pay or deny claims according to the employer’s rules, and establish networks of hospitals, physicians, and other providers. In this way, the employers save the costs that they would normally pass along to health plans if they contracted with health plans in the traditional way and they can avoid some of the most costly requirements that states impose on health insurers.

Since the Affordable Care Act was signed into law in 2010, small employers have seen that being self-insured allows them to avoid the benefit requirements of the Affordable Care Act.

If too many small companies self insure, however, they could take many young, healthy workers out of the small-business exchanges, leaving traditional insurers in the exchanges with older and sicker workers. If traditional insurers are asked to insure older and sicker Americans, then their costs may rise, forcing them to raise the rates the charge or leave the exchanges.

For more on this topic, see this tip sheet: “Self-coverage by small business could harm Obamacare exchanges.”