The small-group death spiral and the move to self-funding
Hey kid, you ever seen a death spiral before?
What's happening?
Forty percent of small employer plans have left the fully-insured market for self-funding.
Health insurance costs are soaring, in large part because state mandates inflate expenses. Self-funded plans, on the other hand, avoid these mandates, resulting in lower costs for employers.
Under ERISA, employer-sponsored health plans are generally exempt from state law. The exception to that rule is called the "savings clause," which permits states to regulate insurance sold within their borders.
This means state legislators often respond to constituents demanding coverage for specific conditions by adding new mandates. While each mandate might be well-intentioned, collectively, they drive up the cost of insurance. It's a classic case of policy decisions having financial consequences—more coverage leads to higher expenses. E=CUP shows up again: an increase in Utilization (U) leads to an increase in Expense (E).
Enter self-funding. By shifting to self-funded plans, employers can avoid state mandates altogether, effectively changing their regulatory landscape.
Even major insurance carriers that once resisted self-funding are now on board through "level-funding." This approach makes self-funded plans resemble fully-insured ones but keeps them outside the reach of state insurance regulators.
And it's attractive. According to an NAIC analysis, approximately 40% of employers with 3 to 99 employees are exiting the fully insured small-group health insurance market in favor of level-funded plans.
Why does this matter? The groups most likely to switch are those with healthier employees—the ones that underwrite well and benefit the risk pool. This leaves behind groups that may not underwrite as favorably and can't capitalize on cost savings.
As healthier groups depart, the risk pool deteriorates, causing premiums to rise. This creates a vicious cycle—a "death spiral"—where increasing costs drive more healthy groups away, further destabilizing the market.
I can't say exactly when the fully-insured group health insurance market will reach its tipping point, but one thing is clear: that day is coming.
Benefits Advisors/Brokers/Consultants who are primarily in the fully-insured space today would be well-advised to get familiar with the future of the market, including level-funding and ICHRA.
Employers need to understand the differences between fully-insured and self-funded as it relates to not only price, but protection.
Originally posted on LinkedIn, where the discussion and source links live in the comments.