Those who are involved in the group medical business, and more specifically the self-funded group medical business, know that small-group self-funding has become a hot topic over the last few years.
The rating and underwriting restrictions on fully-insured medical plans covering small groups caused many companies to shift to self-funded plans. The regulations for self-funded plans are significantly less burdensome and the absence of rate restrictions allows healthy groups to pay significantly less premium.
The participants in this newly expanded small-group self-funded market have been learning about its characteristics. As usual, the simple lessons are the most important. It turns out that healthy people are more likely to work in organizations with other healthy people. By the same token, sicker people are likely to work in organizations with sicker people. This pattern is particularly striking in smaller companies, such as those with 50 or fewer employees.
This concentration of people with similar health statuses has a major impact on rating strategies for small-group self-funded programs. Healthy groups are more likely to receive refunds on programs that are fully-funded. Sick groups are more likely to incur aggregate stop-loss claims. Neither situation is good from the stop-loss insurer’s perspective. We always want to minimize refunds and also minimize aggregate stop-loss claims.
The answer seems to be separate rating models dependent on health status. That makes rate structures more complicated, but it makes the product more attractive for the healthy groups and more profitable for all groups.
Small group self-funding is really nothing new. I first worked on a similar program in the early 1980’s. However, ACA can potentially make the product much more attractive. Further, the regulatory structure for self-funded plans is much less burdensome than that for fully-insured small-group medical plans.