A proposal passed by the North Carolina House of Representatives could mean significant health insurance premium increases for small businesses.

The change is tucked away in the larger Department of Insurance omnibus bill. It appears simple, and even beneficial, at first glance. But its implications could far-reaching and costly.

The change would allow small businesses with five or more employees to have self-funded health insurance plans by making them eligible for stop loss insurance.

Currently small businesses must have 20 or more employees to be eligible for stop loss.  

Why is moving from 20 to five employees to access self-funded plans through stop loss eligibility risky?

First, let’s look at what ‘self-funded’ health insurance means.

Essentially, when an employer self-funds their insurance plan it means they take contributions from employees, put the money in a pot, and use it to pay for medical expenses. The employer contracts with a health insurer for administrative services like claims processing and provider networks.

Next, the employer buys ‘stop loss’ insurance from the health insurer. Stop loss insurance protects a self-funded business if their employee’s medical costs become too high and unaffordable. For example, a business may purchase a $1 million stop loss plan. If, during the year, the employee’s combined medical costs exceeded $1 million, the insurer would pay the balance.

So, if a company had a $1 million stop loss plan and its medical claims for the year were $1.5 million, then the insurer would pay the $500,000 balance.

Many businesses choose the self-funded setup because premiums are less expensive.

So why could this be a bad thing?

There are two big problems, and both have to do with the way the insurance market works.

Problem One

Employers who move to self-funded arrangements often have younger and healthier employees. They make the move because their medical expenses are low, and therefore their self-funded premiums are low.

But, when younger and healthier businesses go the self-funded route, the market of non-self-funded businesses (or ‘fully insured’ as the industry calls it) gets older and sicker, as businesses with older and sicker employees often cannot afford to go the self-funded route.

When the market gets older and sicker, premiums go up so they can cover the increased medical expenses.

In turn, that drives more employers into less expensive self-funded arrangements and causes even greater premium increases for those who cannot self-fund.

Problem Two

Employers who choose to self-fund, especially as they get smaller in size, are more impacted by significant medical events.  

For example, let’s say a healthy, five-employee business elects a self-funded arrangement under the legislature’s new proposal. But then, one employee receives a breast cancer diagnosis. Medical costs for this business are going to increase substantially as treatment can costs upwards of $100,000 a year.

Because of the group’s small size, they are fewer members to absorb the cost and claims will increase dramatically.

The group’s stop loss insurance will cover the high claims for the year, but their premiums will skyrocket the following year as the insurer providing the stop loss coverage must account for the dramatic claim increase.  

Or they may not be offered stop loss coverage at all. Unlike with fully insured small group plans, there are no federal regulations that guarantee a group is offered stop loss coverage.

Either the dramatic premium increases or lack of renewability will force the group back to the ‘fully-insured’ market where their insurance costs will be significantly higher because of the cycle we saw in problem one.

The reason stop-loss eligibility is set at 20 or more workers is because these businesses have an employee-base that can more easily absorb significant medical expenses the way a business with just five workers cannot. They have a deeper resources and more predictability since the risk is spread across a larger employee base.  

How has this worked in other states?

North Carolina is not the first state that has sought to allow smaller businesses to access self-funded arrangements.

Georgia, Virginia and Kentucky have gone down this same path and their experiences provide us with stark warnings.

In Georgia, premiums have increased by 81 percent over six years for small businesses who chose not to self-fund. That amounts to more than $4,500 per person per year.

In Kentucky, premiums have increased by 67 percent, or more than $3,500 per person per year.

In Virginia, premiums have increased by 37 percent, or nearly $2,000 per person per year.

Compare this to North Carolina where premiums have only risen by just over two percent a year over the last six years.  

Going from 20 to five may sound good. It may even provide a small number of businesses with access to lower premiums for a year or two.

But the long-term impacts are significantly higher health insurance costs for small businesses.

As other states have shown, this isn’t a road North Carolina should travel down.

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