Saving Small-Employer Health Insurance

• Author: Amy B. Monahan - Daniel Schwarcz
• Position: rofessor and Solly Robbins Distinguished Research Fellow at the University of Minnesota Law School - Associate Professor at the University of Minnesota Law School
• Pages: 1935-1989

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1935

Saving Small-Employer Health Insurance

Amy B. Monahan & Daniel Schwarcz

ABSTRACT: Health care reform devotes substantial attention to

resuscitating the small-group health insurance markets that serve employers

with fewer than fifty full-time employees. Nevertheless, a number of

interweaving provisions embedded within the Affordable Care Act create

strong incentives that, starting in 2014, will tend to undermine these

markets and, in the process, increase the fiscal cost of reform. First, small

employers with predominantly low-income employees will tend to opt out of

small-group markets. Second, small employers with mixed-income employees

will have strong incentives to offer coverage that is either technically not

“affordable” or that fails to provide “minimum value” in order to preserve

the availability of premium and cost-sharing subsidies on individual

markets for their low-income employees. Third, small employers with

unusually low-risk employees will have strong incentives to self-insure any

group plan they do offer in order to avoid cross-subsidizing higher-risk

groups. Analyzing these risks collectively, this Article offers a number of

recommendations for saving small-group markets. For instance, it argues

that the Small Employer (“SHOP”) exchanges that are intended to organize

small-group markets in 2014 must strategically target the weaknesses of self-

insurance by offering simple and risk-free coverage options that facilitate

employee choice. They must also market this coverage aggressively in

response to insurance brokers’ likely financial incentives to push self-

insurance on small employers. Additionally, state and federal regulators

should explore various possibilities for making small employers more likely to

offer group coverage through SHOP exchanges. To accomplish this, they

should consider regulating stop-loss insurance and preventing churning

between the self-insured and small-group markets.

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 Amy Monahan is a Professor and Solly Robbins Distinguished Research Fellow at the

University of Minnesota Law School and Daniel Schwarcz is an Associate Professor at the

University of Minnesota Law School. We are grateful to Mark Hall, Allison Hoffman, Timothy

Jost, and Bill Sage as well as to participants in workshops at Cornell Law School and UCLA Law

School for helpful comments on earlier drafts of this Article. A condensed version of this

Article was published simultaneously as Amy Monahan & Daniel Schwarcz, Limiting the ACA’s

Threats to Small Group Health Insurance Markets, 16 RISK MGMT & INS. REV. 25 (2013).

1936 IOWA LAW REVIEW [Vol. 98:1935

INTRODUCTION .................................................................................... 1938

I. THE ACA’S REFORM OF SMALL-GROUP MARKETS ............................... 1942

A. SMALL-GROUP MARKETS PRE-ACA ................................................. 1942

B. THE REGULATION OF INDIVIDUAL AND SMALL-GROUP MARKETS

POST-ACA ..................................................................................... 1945

1. The ACA’s Regulation of Individual and Small-Group

Markets .................................................................................. 1945

2. The ACA’s Subsidies and Taxes in Individual and Small-

Group Markets ...................................................................... 1947

II. SMALL EMPLOYERS AND THE DECISION TO OFFER GROUP COVERAGE

POST-ACA ............................................................................................ 1950

A. SMALL EMPLOYERS WITH PREDOMINANTLY LOW-INCOME

EMPLOYEES .................................................................................... 1951

B. SMALL EMPLOYERS WITH PREDOMINANTLY HIGH-INCOME

EMPLOYEES .................................................................................... 1956

C. MIXED-INCOME SMALL EMPLOYERS ................................................ 1958

D. THE IMPACT OF SMALL EMPLOYERS’ COVERAGE DECISIONS .............. 1963

III. SELF-INSURANCE AND SMALL-GROUP MARKETS POST-ACA ................. 1965

A. BACKGROUND ON SELF-INSURANCE .................................................. 1965

B. BENEFITS TO SMALL EMPLOYERS OF SELF-INSURING IN 2014 ............ 1967

1. General Advantages ............................................................. 1967

2. Self-Insurance as Part of the Affordability or Minimum-

Value Strategies .................................................................... 1968

3. A Hidden Benefit of Self-Insurance and the Minimum-

Value Strategy: Dumping High-Risk Employees ................ 1969

C. REDUCED RISKS OF SELF-INSURING IN 2014 ..................................... 1970

D. THE IMPACT OF SMALL EMPLOYERS’ DECISIONS TO SELF-INSURE ...... 1972

IV. SAVING SMALL-GROUP MARKETS ......................................................... 1975

A. REGULATE STOP-LOSS COVERAGE .................................................... 1975

B. DESIGNING SHOPS TO COMPETE AGAINST SELF-INSURANCE ............. 1978

1. Leverage Employee Choice ................................................. 1980

2. Leverage Limited Risk ......................................................... 1981

3. Leverage Simplicity .............................................................. 1982

4. A Cautionary Note on Defined-Contribution

Arrangements ....................................................................... 1983

C. BROKER INCENTIVES AND SELLING SHOPS OVER SELF-INSURANCE .... 1984

D. ADDITIONAL REGULATORY/LEGISLATIVE OPTIONS FOR STATES ........ 1986

1. Limit Churning Between SHOP Exchanges and Self-

Insurance .............................................................................. 1986

2. Merge the Individual and Small-Group Markets ............... 1988

2013] SAVING SMALL-EMPLOYER HEALTH INSURANCE 1937

3. Expand the Small-Group Market to 100 Full-Time

Employees in 2014 ............................................................... 1988

E. A NOTE ABOUT FEDERAL LEGISLATIVE OPTIONS .............................. 1989

CONCLUSION ....................................................................................... 1989