The Patient Protection and Affordable Care Act (PPACA)1 has now been the law of the land for more than five years. The disastrous roll out of health care exchanges (or marketplaces) and other key aspects of the law appears to be largely behind us (with the possible exception of the rapid collapse of many co-op insurers). So, despite continued calls for repeal, and continued pressure for more modest modifications to the law by many others, the key architecture of PPACA looks to be here to stay.
PPACA introduced a substantial degree of uniformity with respect to the offerings and regulation of health insurance among the 50 states, and effectively eliminated from the market many alternatives to major medical insurance. At the same time, the costs for medical care, and thus the premiums associated with health insurance, have remained stubbornly and increasingly high. As a result, employers continue to look for ways to cut costs and/or reduce risk when it comes to health insurance. This article explores some of the ways in which employers in New England (and beyond) are looking for innovative solutions to address the costs of health insurance in the PPACA era.
1. PPACA’s Affect on the Health Insurance Market
PPACA effectively creates a uniform, national standard for health insurance benefits (referred to as the “essential health benefits” package) in the small group market2 and a uniform set of market reforms for both the small and large group markets.3 This has had the effect of generally eliminating a number of products that cannot meet these benefit and market reform standards. Although PPACA retains the concept of “excepted benefits” that are not required to include the essential health benefits, these products are limited to those that supplement major medical (e.g., Medicare supplemental, stand-alone vision) or that include a health component on an ancillary basis only (e.g., accident only, Medpay benefits under auto policies).4
At the national level there is a trend towards consolidation of health insurance carriers to increase scale and efficiency. At the local/regional level new entrants (such as co-ops or smaller regional carriers) can have difficulty achieving sufficient market share to make the business profitable. The problem of adverse selection for such carriers has been exacerbated by PPACA, which prohibits carriers from underwriting or imposing pre-existing condition limitations (really a “take all comers” requirement).
Although the principal focus of the PPACA market reforms was on fully-insured plans offered by traditional health insurance carriers, the law also imposed a number of new requirements on self-insured arrangements. Thus, for example, self-insured arrangements became subject to the prohibition on annual and lifetime limits, the prohibitions on discriminating based on health status factors and pre-existing condition limitations, coverage of certain preventative services and the expansion of dependent coverage to age 26.5 Collective self-insured arrangements (such as multiple employer welfare arrangements (MEWAs) or qualified association plans) are subject to PPACA requirements, with certain limited exceptions. The interaction of federal and state law with respect to such collective self-insured arrangements means that such collective arrangements must generally apply small group rating factors to those participants who meet the applicable small group definition, rather than rating based on the experience of the entire collective group.6
The net effect of all this change is that employers generally have a substantially narrower range of options within the traditional insurance market than they had prior to PPACA. Although PPACA-compliant coverage is often “better” coverage than what employers have seen in the past,7 the fact remains that premiums continue to increase at a steady clip year-over-year. These pressures have encouraged brokers, consultants and employers to look to both traditional and non-traditional solutions.
2. Using Alternative Risk Arrangements to Reduce Costs
PPACA is expected to usher in a new wave of alternative risk and payment structures between insurance carriers and health care providers. But it has also encouraged employers and their advisors to seek out alternative risk arrangements. Below is a description of some of the more common and more innovative risk strategies that we have observed among employers in the New England region.
A. Enhanced Risk Retention Under Fully-Insured Arrangements
Perhaps the most common, and also the most conservative, approach to shifting risk is through the use of deductibles and health reimbursement arrangements (HRAs) to shift more risk to employers and/or employees and thus reduce premium costs.
The rise of high deductible health plans was well underway before the advent of PPACA. However, PPACA has accelerated this trend, with individual deductibles now commonly reaching or exceeding $5,000 annually. Although the original PPACA language would have capped the deductibles permitted under small group health plans,8that limitation was subsequently repealed, leaving small groups generally free to continue to increase deductible levels.9
Although some employers have simply used deductibles as a means of shifting costs to plan participants, others have affirmatively undertaken increased risk by agreeing to reimburse participants for some or most of their out-of-pocket costs. The use of HRAs effectively allows employers to retain a portion of the first dollar risk associated with certain claims experience.
For employers that have good demographics, or that otherwise have a good understanding of their risk profile (e.g., through prior use of HRAs), this can be an effective means of reducing the rate of premium increases without also reducing the value of the coverage to employees. If done properly, the premium savings realized from the additional assumption of risk will exceed the claims experience under the HRA.
Although this approach has appeal for its relative simplicity it does have substantial downsides. Most importantly, the relative benefit decreases over time. As deductibles increase, the corresponding premium savings begin to decrease, while the employer assumes more and more aggregate risk for its employee population. In addition, beyond the greater complexity, the use of an HRA may introduce additional administrative costs and additional burdens on participants. Accordingly, while this approach can result in significant short-term premium savings, it does not fundamentally alter the cost trajectory.
B. Individual and Collective Self-Insurance Arrangements
Self-insurance is by no means new, but true self-insurance has generally been reserved for large organizations that have both a broad enough pool of participants to spread and average risks and the scale to make the assumption of that level of collective risk feasible. Over the years, an increasing number and diversity of employers have sought individual or collective self-insurance solutions in an effort to gain the benefit of their own claims experience.
The challenge for smaller organizations is that they may not have enough lives over which this substantial risk can be spread. In that case even a handful of large claims can be catastrophic for the self-insured plan. Self-insurance has become even more challenging since the passage of PPACA. As discussed earlier, there are a number of important PPACA requirements that apply to self-insured plans, including the prohibition on annual benefit limits. This requirement means that self-insured plans effectively have unlimited liability with respect to individual claims/members.
One solution to this problem is for smaller organizations to obtain “stop loss” insurance. These policies serve to protect employers from catastrophic risk under self-insured plans. These policies require employers to retain a certain portion of risk, above which the stop loss policy will attach. Typically, these attachment points are on a per claim or aggregate claims basis, or both.
However, because these stop loss policies are not intended or permitted to serve as health insurance, state insurance laws set mandatory minimums for attachment points.10 This means that employers are typically still assuming a substantial dollar amount of exposure, all of which is on a first dollar basis. In addition, it is critical for purchasers of stop loss both to understand the mechanics of the applicable attachment points and to be confident in the financial strength of the stop loss carrier, so that the employer has a true picture of the risk it is assuming (and retaining). This is especially important because of the “unlimited risk” effect of PPACA.
In light of the risks associated with smaller employers utilizing individual self-insurance arrangements, even with stop loss protection, another solution is for multiple employers to band together, pool their risk and share the resulting experience. Many industry associations have historically offered members the opportunity to purchase health insurance as a benefit of membership; however, these are often fully-insured arrangements that benefited from the purchasing power of the association. Such collective purchasing arrangements may also be available to non-association groups of employers and may include related administrative services.11 Although employers may be able to realize more competitive rates and other benefits from such arrangements, they do not involve the sharing of risk.12
More substantial benefits may accrue to employers when they are actually combining their participants in a single pool, whether through a qualified association trust, MEWA or other similar entity. In this way, multiple employers can effectively create a large enough pool to spread their catastrophic risk exposure and realize the benefit of this more diffuse risk through lower overall claims costs and more aggressive claims and care management. However, the benefits of certain of these arrangements may be limited because of rating requirements applicable to small employer groups.13 In many cases, these collective self-insured arrangements (particularly if they are of relatively recent origin) will effectively be treated as insurance companies, and largely regulated as such.14 The applicable statutory requirements often require these arrangements to rate small employer groups under stricter community rating standards, thus eliminating or limiting the benefit of the collective arrangement as to such small employer groups.15 Although PPACA does not affirmatively address this issue, it arguably supports this outcome.16
A more recent, and relatively untested, innovation we have seen combines some of the elements of the individual and collective models, in particular for small employer groups. Under this approach, an employer retains its own claims risk/experience with stop loss coverage, but utilizes a uniform risk/claims management program as to its retained risk (i.e., employers collectively participate in the program, but not the risk). This approach theorizes that small employers (or at least certain small employers) can adequately control their retained risk through active risk management (e.g., wellness programs, care coordination, etc.) such that the stop loss coverage will be sufficient to protect them against catastrophic risk. As noted, however, the results of this approach remain to be seen.
C. Captive Insurance Arrangements
Captive insurance companies17 have long been used by organizations to realize savings on liability, workers’ compensation and other insurance risks by creating their own subsidiary insurance company to which risk can be transferred. Traditionally this practice was limited to P&C risks, but more recently there has been a trend towards expanding captives to include life, disability and now health insurance risks.
Captives arguably represent both the most complex and innovative alternative risk arrangement for health insurance. Captive arrangements also vary in their form, from the formation of stand-alone licensed captives (effectively an independent insurance entity owned by an organization) to the “renting” of a participation or cell in a captive organization independent of the risk transferring entity.
We recently assisted a client in the review and risk analysis of one such type of hybrid captive arrangement. This particular scenario involved a partial collaboration among multiple employers, each with their own independent health insurance plans. The arrangement involved three essential elements as follows: (1) each employer agreed to maintain a health insurance plan with a particular self-insured retention amount per insured member; (2) each employer agreed to maintain stop loss insurance with an independent carrier that would attach above the self-insured retention; and (3) the employers jointly agreed to participate in and fund a captive cell for the purpose of reinsuring the stop loss risk within a certain risk corridor.18
This strategy incorporated a number of elements from the different solutions we have already discussed here. First, it required the employers to retain a certain portion of the first dollar risk (which was not insignificant). This retention generally necessitated a certain degree of scale, as well as active risk management. Second, it contemplated the use of stop loss insurance to protect the employers against catastrophic risk, which required a careful assessment of the workings of the stop loss arrangement and the financial standing of the carrier. Finally, it involved the collective sharing of risk among the employers as to the amounts reinsured, which was made possible by the use of the captive cell.
This structure allowed each employer to retain a manageable (but still sizeable) level of first dollar risk and then effectively spread the risk above those levels among the collective group of employers. In theory this will allow the employers to manage their initial claims exposure at a level they are comfortable with or accustomed to while benefiting from the collective experience of the combined group for larger exposures. It also arguably allows the employers to achieve cost savings through increased administrative efficiencies.19 Although the reinsured risk was substantial on a per claim basis, the stop loss carrier bore the risk for individual claims above the reinsurance corridor on an unlimited basis. This was a critical component in light of the “unlimited risk” concern discussed earlier. Without this safety net in place the arrangement almost certainly would not have been feasible for these employers.
This structure is of course just one example of the potential use of captives for assuming health insurance risk. There is some evidence of a possible trend towards employers establishing stand-alone captives for insuring their health insurance risks (or using existing captives for this purpose where feasible). This is unsurprising given the success of captives on the P&C side, the complexity of health insurance administration (necessitating a lot of infrastructure) and the potential cost savings.
Moreover, while many captive arrangements utilize offshore captives or captive cells (including the one described above), there are vibrant captive jurisdictions closer to home. In particular, Vermont has established itself as one of the premier jurisdictions for captives, because of its long history with captives and the deep knowledge and experience of its regulators.20 In addition, Vermont has for many years taken a leading role on issues related to health care reform, such that it is uniquely familiar with the challenges of regulating health insurance markets and realizing affordable health insurance.21 With this background and expertise, it is not hard to envision Vermont becoming a leader in captive health insurance arrangements.
3. Conclusion
Although PPACA is largely here to stay, the health insurance landscape is anything but certain. There are signs that the trend of increasing premium rates may be abating, and that insurers and providers are starting to make more meaningful efforts to tackle the underlying costs of health care. However, changes to reimbursement systems have been modest and incremental, and it appears that employers will continue to see substantial increases in annual premiums for the foreseeable future (even if the rate at which they are increasing has leveled off). For these reasons, we will likely see further experimentation with alternative health insurance risk arrangements.
As employers look to achieve cost savings while maintaining an attractive benefit for their employees, it is essential that they carefully and critically evaluate the risks that they are assuming. Alternative risk arrangements offer promise for those employers who engage in careful planning and seek the right fit, but employers must be mindful to strike the right balance between risk and reward.
1. Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119 (2010).
2. 42 U.S.C. § 300gg-6. The definition of “small employer” (and thus the scope of these coverage provisions) was slated to apply to groups of 51-100 employees starting January 1, 2016 in those states that had retained small group market definitions of up to 50 employees. However, pursuant to the recently enacted Protecting Affordable Coverage for Employees Act, Public Law 114-60, small employers will now be defined under PPACA as groups of 1-50; provided that states may elect to expand the definition to cover employers with 51-100 employees at their option.
3. Large employers (i.e., those with more than 50 employees or, in some cases, those with more than 100 employees) are not subject to the “essential health benefits” or community rating requirements. However, these groups are subject to most other market reform provisions, such as the prohibitions on lifetime and annual limits. 42 U.S.C. § 300gg-11.
4. 42 U.S.C. § 300gg-21(b) & (c); 42 U.S.C. § 300gg-91(c).
5. 42 U.S.C. § 300gg-3; 42 U.S.C. § 300gg-4; 42 U.S.C. § 300gg-11; 42 U.S.C. § 300gg-13; 42 U.S.C. § 300gg-14.
6. See, e.g., NH RSA 420-G:3 (applying New Hampshire’s small group rating rules to MEWAs); Me. Rev. Stat. Ann. Tit. 24-A, § 6603(1)(H) (applying Maine’s small group rating rules to MEWAs).
7. For example, PPACA imposes a maximum limit on out-of-pocket expenses above which the member is not required to pay any expenses.
8. Pub. L. No. 111-148, § 1302(c)(2), 124 Stat. 163, 896 (2010) (codified as amended at 42 U.S.C. § 18022).
9. Protection Access to Medicare Act of 2014, Pub. L. No. 113-93, § 213, 128 Stat. 1047 (2014).
10. See, e.g., NH RSA 415-H:3, I(a).
11. See, e.g., NH RSA ch. 420-M (authorizing the establishment of “purchasing alliances” that may be maintained for the benefit of employers without any common affiliation, so long as the alliance is open to all employers without discrimination).
12. See, e.g., NH RSA 420-M:7, III(a) (providing that a “purchasing alliance” may not assume risk or otherwise purchase health care services directly).
13. Specifically, many state laws require that small groups be subject to some form of community rating (i.e., rating based on the carrier’s entire pool of small group plans), thus effectively prohibiting such groups from realizing benefits from their own experience either individually or collectively.
14. See, e.g., NH RSA 415-E (requiring that self-insured MEWAs become licensed and subjecting them to various financial and reporting requirements).
15. See supra note 6.
16. See Patient Protection and Affordable Care Act; Health Insurance Market Rules; Rate Review, 70 Fed. Reg. 70,584, 70,589 n.28 (Nov. 26, 2012).
17. The term “captive insurance company” typically includes a variety of different arrangements. See, e.g., 8 V.S.A. § 6001, which defines the term under Vermont law to include “any pure captive insurance company, association captive insurance company, sponsored captive insurance company, industrial insured captive insurance company, risk retention group, or special purpose financial captive insurance company formed or licensed under the provisions of this chapter.”
18. Importantly, beyond the reinsured risk corridor the stop loss carrier assumed all risk as to individual claims.
19. Even to the extent an employer intended to use a third party administrator (which is typical of self-insurance arrangements), this is often viewed as being more cost efficient than paying the administrative expense of insurance carriers through premium dollars.
20. See, e.g., http://www.vermontcaptive.com/about-us/.
21. Vermont has been at the forefront of health care reform for a number of years, advocating PPACA-like market reforms, exploring a single-payor system for the state and being an early adopter of the state exchange model under PPACA.