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85–594 2014

SELF-INSURANCE AND HEALTH BENEFITS: AN 

AFFORDABLE OPTION FOR SMALL BUSINESS? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON HEALTH AND TECHNOLOGY 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

NOVEMBER 14, 2013 

Small Business Committee Document Number 113–042 

Available via the GPO Website: www.fdsys.gov 

SBREP-219 with DISTILLER


Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

SAM GRAVES, Missouri, Chairman 

STEVE CHABOT, Ohio 

STEVE KING, Iowa 

MIKE COFFMAN, Colorado 

BLAINE LUETKEMER, Missouri 

MICK MULVANEY, South Carolina 

SCOTT TIPTON, Colorado 

JAIME HERRERA BEUTLER, Washington 

RICHARD HANNA, New York 

TIM HUELSKAMP, Kansas 

DAVID SCHWEIKERT, Arizona 

KERRY BENTIVOLIO, Michigan 

CHRIS COLLINS, New York 

TOM RICE, South Carolina 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

KURT SCHRADER, Oregon 

YVETTE CLARKE, New York 

JUDY CHU, California 

JANICE HAHN, California 

DONALD PAYNE, JR., New Jersey 

GRACE MENG, New York 

BRAD SCHNEIDER, Illinois 

RON BARBER, Arizona 

ANN McLANE KUSTER, New Hampshire 

PATRICK MURPHY, Florida 

LORI SALLEY, Staff Director 

PAUL SASS, Deputy Staff Director 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Chris Collins ................................................................................................... 1 

Hon. Janice Hahn .................................................................................................... 2 

WITNESSES 

Mr. Michael W. Ferguson, President and Chief Executive Officer, Self-Insurance Institute of America, Inc., Simpsonville, SC ............................................. 3 

Ms. Robin P. Frick, Combined Benefits Administrators, Inc., Madisonville, 

LA, testifying on behalf of the National Association of Health Underwriters 6 

Mr. Thomas Faria, President, Sheffield Pharmaceuticals, New London, CT ..... 7 

Dr. Linda J. Blumberg, Senior Fellow, The Urban Institute, Washington, 

DC .......................................................................................................................... 9 

APPENDIX 

Prepared Statements: 

Mr. Michael W. Ferguson, President and Chief Executive Officer, SelfInsurance Institute of America, Inc., Simpsonville, SC ............................. 30 

Ms. Robin P. Frick, Combined Benefits Administrators, Inc., Madisonville, LA, testifying on behalf of the National Association of Health 

Underwriters ................................................................................................. 38 

Mr. Thomas Faria, President, Sheffield Pharmaceuticals, New London, 

CT ................................................................................................................... 43 

Dr. Linda J. Blumberg, Senior Fellow, The Urban Institute, WAshington, 

DC .................................................................................................................. 48 

Questions for the Record: 

None. 

Answers for the Record: 

None. 

Additional Material for the Record: 

Bill H.R. 3462 ................................................................................................... 81 

Chamber of Commerce of the U.S. of America ............................................... 84 

Letter from Lawrence Thompson, Regional President, POMCO Group ...... 85 

Statement for the Record from Rep. Bill Cassidy (LA-6) .............................. 87 

Woodland Truck Line, Inc. .............................................................................. 89 

SBREP-219 with DISTILLER

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(1) 

SELF-INSURANCE AND HEALTH BENEFITS: AN 

AFFORDABLE OPTION FOR SMALL BUSINESS? 

THURSDAY, NOVEMBER 14, 2013 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

SUBCOMMITTEE ON HEALTH AND TECHNOLOGY, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 10:00 a.m., in Room 

2360, Rayburn House Office Building. Hon. Chris Collins [chairman of the subcommittee] presiding. 

Present: Representatives Collins, Coffman, Luetkemeyer, 

Huelskamp, Hahn, and Schrader. 

Chairman COLLINS. Good morning. I want to thank everyone 

for being with us today, and we want to take a look, I think it is 

very appropriate, at the trend of smaller companies now exploring 

self-insurance as a very viable option to provide their employees 

with healthcare coverage. I appreciate all of our witnesses taking 

time out of their business schedules to be with us today. 

Just last week, President Obama apologized to the 4.8 million 

Americans who had their insurance policies canceled since this 

healthcare act was enacted. This includes 137,000 people in my 

area of Western New York. And while I appreciate the president’s 

apology, these cancelations represent just one of the many broken 

promises and severe problems plaguing the rollout of his signature 

legislation. 

The list of issues with this implementation is staggering—the 

bumbling of the healthcare.gov website; the 30-hour per week definition of full-time employment; the medical device tax; the health 

insurance tax; the cancelation of policies; and of large concern to 

those of us who serve on this Committee, small businesses facing 

significant increases in the cost of their healthcare plans, upwards 

of 55–60 percent in some cases. 

These are not issues that the president and the administration 

will be able to resolve anytime soon. So as the confusion continues, 

small businesses and the people they employ continue to be left in 

the dark about what January 1, 2014, will mean to them, their 

healthcare needs, and the cost. 

The subject of today’s hearing is certainly not a magic elixir that 

can solve all of these problems for every small business, but it 

could be available option. Amid all of this confusion, small firms 

need as many options as they can find to keep their businesses 

moving forward and make money so they can invest in the growth 

of their companies. 

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2 

In a self-insured situation, an employer can choose to assume all 

or a portion of the cost and the risks associated with sponsoring a 

healthcare plan. Under this arrangement, the employer forecasts 

how much it is likely to spend on health benefits—it is usually an 

actuarial calculation—and then decides whether or not it makes 

practical or economic sense for that employer to pay these costs out 

of pocket or to purchase a fully-insured product. Traditionally, 

small businesses have not utilized the option to self-insure. According to the Kaiser Foundation, only about 16 percent of employees 

at small firms are currently covered by a self-insured policy, as opposed to nearly 83 percent of employees at large firms. But with 

the onslaught of regulations, cost increases, and uncertainty surrounding fully-insured plans as a result of the president’s 

healthcare law, more small businesses may choose to explore selfinsurance as a manner of providing competitive benefit packages 

for their employees. Some small business owners may find that a 

self-insured policy would be cheaper as it may offer them greater 

flexibility in designing the health coverage they want to provide for 

their employees. 

With that said, there are some potential disadvantages as well, 

such as an instance of higher than expected employee claims and 

additional administrative costs that could discourage smaller firms 

from utilizing the self-insured plans. We are not here today to advocate one method over the other, but rather we are here to examine if self-insurance is a viable for some businesses. When we say 

if, it really is, but that is what we are going to cover today. And 

so we ought to continue to preserve that option for small businesses, especially considering the uncertainty surrounding the 

fully-insured marketplaces Obamacare continues to be implemented. 

Again, I want to thank everyone for being here today. I look forward to the testimony. And before we do that I want to yield to 

Ranking Member Hahn for her opening statement. 

Ms. HAHN. Thank you, Mr. Chairman. I am pleased that we are 

holding this hearing today. 

The Affordable Care Act introduced many substantial changes to 

health care, and these reforms will improve access to and adequacy 

of coverage, allowing young people to stay on their parents’ insurance, expanding Medicaid, and not denying coverage as a result of 

a preexisting condition. California knows how to do things right. 

We have already had 59,000 enrollees in Covered California, so we 

are ahead of the nation in terms of having our website working and 

people actually going online and getting good plans, affordable 

plans, so we are very proud of what we are doing in California. 

The small businesses exchanges will offer opportunities for small 

businesses to provide quality health insurance to their employees. 

At the same time, self-insurance or self-funding could be an option 

for small businesses to offer insurance coverage at low prices or 

with greater flexibility. Though this option is not for everyone, it 

could reduce the cost of coverage for small businesses willing to 

take on that challenge. While self-funding has traditionally been 

more common among larger employers than small ones, there is 

growing interest in this method of insurance. However, it is still 

SBREP-219 with DISTILLER

3 

unclear just how many companies have already self-insured in response to the law or are planning to do so. 

With the opportunity to minimize risk but still offer comprehensive coverage, small entities have expressed an interest in learning 

more about self-insuring. Today’s hearing will allow us to learn 

more about how self-insurance works for small firms and what factors they must consider before deciding to move in this direction. 

We will also hear from witnesses about the benefits and pitfalls of 

self-funding for employers and what role health reform plays in 

these decisions. While this option holds promise for small firms, experts have indicated it could prevent much needed consumer protections from applying to workers in small entities. For that reason, we will also discuss how self-insurance could affect these companies’ hardworking employees. As we examine this very important 

insurance alternative, we are looking for feedback to see how it will 

impact small employers and how we can ensure a broad range of 

insurance vehicles. 

I thank all the witnesses for being here today, and I look forward 

to your comments. Thank you, and I yield back. 

Chairman COLLINS. Thank you. 

To begin with, if Committee members do have an opening statement, I ask that they be submitted for the record. And I would like 

to take a moment to explain the timing lights that are in front of 

you. You each have five minutes to deliver your testimony. The 

light starts out as green. When you have one minute remaining, 

the light turns yellow. And finally, at the end of your five minutes 

it will turn red. I would ask that you try as you can to adhere to 

that time limit. 

Our first witness today is Michael Ferguson, president and CEO 

of the Self-Insurance Institute of America. Welcome. He has been 

with the association for more than 18 years, and in his current role 

he provides executive management leadership as well as serving as 

the federal lobbyist for the association. Mr. Ferguson has significant expertise on self-insurance matters related to group health 

plans, workers’ compensation programs, and captive insurance 

companies, and operates his own blog which includes original reporting and commentary regarding legislative or regulatory developments affecting the self-insurance industry. Prior to joining SIIA, 

he was a corporate communications specialist for Rockwell International at the company’s world headquarters. Mr. Ferguson 

earned his bachelor’s degree in political science from California 

State University, Long Beach. Thank you for being here, Mr. Ferguson. 

STATEMENTS OF MICHAEL W. FERGUSON, PRESIDENT AND 

CEO, SELF-INSURANCE INSTITUTE OF AMERICA, INC.; ROBIN 

P. FRICK, COMBINED BENEFITS ADMINISTRATORS, INC.; 

THOMAS FARIA, PRESIDENT, SHEFFIELD PHARMACEUTICALS; LINDA J. BLUMBERG, SENIOR FELLOW, THE 

URBAN INSTITUTE. 

STATEMENT OF MICHAEL W. FERGUSON 

Mr. FERGUSON. Well, good morning, Chairman Collins, Ranking Member Hahn, members of the Committee. I am pleased to 

SBREP-219 with DISTILLER

4 

have an invitation to come and join you this morning. I think this 

is a very important and timely topic, and I am hoping to add some 

value to the hearing today. 

The couple areas that I am going to hit on in my oral comments 

today is talk briefly about what self-insurance is and how it differs 

from traditional insurance, who self-insures, the ACA and self-insurance trends, the advantages and disadvantages of self-insurance, and talk about the federal regulation of self-insured plans. So 

the trick will be to do that all within five minutes. So let me get 

right into it. 

Real briefly here, if you are ready to talk about the differential 

between self-insurance and fully-insured, if you are an employer 

and you want to provide group coverage to your employees, you 

really have one of two options. You can do a traditional insurance 

plan where you pay a premium to an insurance carrier, and that 

carrier in exchange for a premium basically takes the risk and provides coverage to your employees. The alternative is, as an employer, you can say, well, instead of paying an insurance company 

to provide coverage for my workforce, I am going to self-insure. In 

other words, I am going to pay the claims out of my own operating 

expenses or trust that I set up to pay the claims. So instead of 

transferring that obligation to an insurance company, the self-insured organization basically takes that obligation onto itself and 

pays the claims as they are incurred. So that is the differential between the fully-insured and the self-insured environment. 

Chairman Collins has already thrown out some statistics in 

terms of the prevalence of self-insurance. Just to pick up on that 

is of particular relevance to this Committee. About 16 percent of 

smaller businesses self-insure. That would be defined within sort 

of three to 200 band; that is reported by the Kaiser Family Foundation. But what I think would be interesting for this Committee to 

also add, although this is the purview of the Small Business Committee, self-insurance is not simply a business strategy that the 

private sector implements. Self-insurance is also very prevalent 

within many labor plans—self-insured Taft-Hartley plans that selfinsure smaller groups as well as many public sector entities, municipalities, many of which are self-insured. 

Collectively, it is estimated about 100 million Americans receive 

their health benefits through various forms of self-insured plans. 

So the self-insurance market is kind of an underreported business 

story but it is pretty significant and it spans, again, both private 

sector, as well as the labor plans, and a third area is municipalities. So it is a fairly big marketplace, and so your hearing today 

is particularly relevant. 

So now that we have talked a little bit about what self-insurance 

is, who self-insures, I want to go ahead and address one of the 

questions that has sort of been raised by the Committee. Obviously, 

we are here because in the context of the Affordable Care Act, what 

does that mean for self-insurance? Is that influencing companies to 

self-insure? If so, why that is. 

Now, it is interesting. In the last year or two you hear a lot of 

public comments that self-insurance is somehow a loop hole to the 

ACA or this is a way to bypass the requirements under the Affordable Care Act. And as my testimony is going to demonstrate and 

SBREP-219 with DISTILLER

5 

hopefully we can get in some Q&A, I actually think that is an incorrect observation of the marketplace and what you actually see 

is companies that self-insure actually subject themselves to more 

regulation collectively, not less than if they were in a fully-insured 

environment. And we will get into some of that. 

So the question is, well, why are companies looking at self-insurance if it is not for some regulatory motivation? Well, I think the 

answer if you talk to companies is that particularly in this environment where there is some uncertainty in the marketplace, there is 

cost fluctuations that have been at least indirectly influenced by 

the healthcare law, what you find is companies that are migrating 

to self-insurance. They want to take more control of their costs. 

They do not want to be subject to an insurance company or a government entity dictating to them what my costs are going to be, 

what overages I am going to have. So by self-insuring, you are able 

to take more control over your plan. To the extent that you have 

decided that you want to provide benefits to your workers, a selfinsured arrangement puts you in the driver’s seat. You are the one 

that controls your plan going forward, and certainly there is some 

work to go that we will talk about in terms of managing the plan, 

but basically, it is control. It is ownership of your plan which selfinsurance provides. So that, I think, would be our observation of 

what is driving that. 

There are several disadvantages to self-insurance. I would say 

that not everybody is cut out for self-insurance. There is a lot of 

financial and regulatory requirements that you have to adhere to, 

which is detailed in my testimony, but there are also several advantages being self-insured. You can better manage your plan, cost 

savings, and a variety of other things that make self-insurance an 

advantage. Again, not the right choice for all organizations, but it 

is a choice for some. 

So with that I will go ahead and—time is short here. I will conclude my testimony, and look forward to answering questions from 

the Committee as they arise. Thank you. 

Chairman COLLINS. Yeah, no, thank you. And we will try to 

cover a lot of these issues. The intent today is really to be informative to small businesses. They are in what we call the traditional 

sign-up period right about now trying to figure out what they are 

going to do the first of the year. 

Our next witness is Robin Frick, who is responsible for key account management, compliance, and corporate operations with 

Combined Benefits Administrators, an enrollment firm and thirdparty administrator, or TPA, that performs insurance carrier billing, claims advocacy, and benefits management located in Madisonville, Louisiana. Robin is testifying on behalf of the National Association of Health Underwriters. She has been an active member of 

the organization for several years and has served on the boards of 

both the local New Orleans chapter and the Louisiana state chapter in several different positions. In 2011, she was accepted onto 

the National AHU Legislative Council, which provides legislative 

advice, communication, and policy positions to the membership, 

Congress, and the administration. Robin received her associate’s 

degree from Emory University in Atlanta, her bachelor’s degree 

SBREP-219 with DISTILLER

6 

from Louisiana State University, and is certified in transplant contract management. 

Thank you for being here. You can begin your testimony. 

STATEMENT OF ROBIN P. FRICK 

Ms. FRICK. Good morning, and thank you. 

My name is Robin Frick, and I am licensed professional health 

insurance agent from Slidell, Louisiana. I would like to thank the 

Committee for inviting me here today to talk about self-funding 

health benefit plans and whether it is an appropriate option for 

smaller employers. I have been in the insurance industry since 

1999, and I have spent my career helping businesses design and 

implement self-funded benefit plans for their employees. I have 

also been a part of my professional association, NAHU, for 14 

years, and I am speaking on behalf of all of our members who work 

on a daily basis to help millions of individuals and employers with 

their health coverage needs. 

Regarding today’s discussion of self-insurance, health benefits, 

and the small employer, I will be frank that the decision to selffund coverage should not be taken lightly. It is a multi-year commitment in which the employer assumes the financial risk for providing medical insurance to its employees and their families rather 

than paying an insurer to bear the risk. The appropriateness of a 

self-funding arrangement is not only determined by the size of the 

employer but also the financial stability of the employer, his or her 

risk tolerance, and the ability to administer a compliant plan. 

There is an increased interest by smaller employers in self-funding 

since the passage of healthcare reform, but this is a transient time, 

and again at the state level when there are market reforms. The 

outcome of small employer self-funding though as a result of market reform measures is still rare. 

Self-funding and stop-loss is not a new phenomenon. It has been 

around long since the days of cargo ships sailing to the New World. 

This new awareness of self-funding and stop-loss marketplace 

stems from the employer anxiety about changes to the new 

healthcare law that may bring to their employee benefit offerings 

such as the new national health insurance tax, the ‘‘Cadillac tax,’’ 

and the changes to premium rate calculations. Self-funding a 

health plan provides a means to structure benefits to meet the specific needs of an employer but does not allow employers to escape 

the impact of healthcare reform. 

Most of the reform laws market protections apply to employer 

groups of all sizes regardless of how they are financed. For example, a safety compliance client with 75 employees in good health 

and stable age-gender demographic, is interested in alternative 

funding such as self-funding with reinsurance in lieu of paying an 

increase over increase each year to fully-insure an insurance policy 

without experiencing the large ongoing claims that would normally 

directly impact the rates. He is experiencing a significant increase 

each year that is not indicative of his employee population. 

On the other hand, an electrical contractor with 50 employees 

that has ongoing health, both medical and prescription drug claims 

each year, would not be able to financially support a benefit plan 

in a self-funded arrangement. His company may be in a healthy fiSBREP-219 with DISTILLER

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nancial position now, but if we extrapolate the expected risk two, 

three, and five years out, he will very much risk losing what he has 

worked so hard to grow. He would pass on the assumption of risk. 

I have experienced quite the opposite, too. A bank client of 170 

employees is considering the transition to fully-insured from selffunding with reinsurance as they can no longer sustain the adverse 

claims. The impact over the last three years has significantly depleted any reserves previously realized and gained through their 

self-funded arrangement, and the concern is that they are behind 

the 8-ball, so to speak, and they cannot get ahead. They are tired 

of assuming that all of the financial risk, the administrative responsibilities, and the compliance liabilities. The growing interest 

in alternative funding mechanisms has led some self-funded marketplace innovation with the development of hybrid level funding 

plans which can ease the transition from fully-insured to self-funding, and we anticipate further growth and innovation within this 

regard. 

From a compliance and regulatory perspective, although selffunded plans fall outside of state-level insurance regulation, though 

they have always been subject to ERISA, stop-loss policies are actively regulated by state insurance departments and are held legally accountable for marketplace conduct; likewise for the licensed 

insurance professionals advising in those arenas. 

In short, as healthcare reform has moved forward, employers are 

looking to gain greater control over their employee benefit options 

and funding mechanisms. I truly appreciate the opportunity to provide testimony to your Committee today. I consider it a huge honor 

to be here and a privilege to be able to inform you, our elected representatives, how the self-funded health insurance marketplace 

works for employers, both large and small. 

Thank you. 

Chairman COLLINS. Thank you very much. 

Up next is Thomas Faria. Is that correct? Faria. President and 

CEO of Sheffield Pharmaceuticals in New London, Connecticut. He 

has been president and CEO of Sheffield, one of the nation’s fastest-growing contract manufacturers of over-the-counter pharmaceutical creams, ointments, and toothpastes since 2002. In this 

role, he is responsible for overseeing all areas of operation of 160 

employees, $30 million pharmaceutical products manufacturing 

company. The responsibility includes the absolute authority on all 

major decisions that affect the company and he acts as the public 

voice in all legal, public, and customer relations. Mr. Faria received 

his B.S. in industrial and operations engineering from the University of Michigan and his MBA from Bryant University in Smithfield, Rhode Island. We appreciate your participation, Mr. Faria, 

and please begin your testimony. 

STATEMENT OF THOMAS FARIA 

Mr. FARIA. First of all, I would like to thank you for the opportunity to speak to you all. I think this is truly a very important 

topic to talk about, especially for small businesses because as you 

review information and some of the topics that are most important 

to small businesses, what usually rises to the top is the ever-inSBREP-219 with DISTILLER

8 

creasing costs and the unknown costs of the future of providing 

health care for their employees. 

Our experience that got us and Sheffield to try self-insurance, it 

really started in 2007. Up until that point, every year we would go 

through and review our health care costs and quote them, and we 

would expect a moderate increase of 5 to 10 percent on our insurance premiums. In 2007, we had a few unfortunate events with our 

employees. They were using—that caused our healthcare costs to 

go up. In response to that, our fully-insured provider increased our 

rates 25 percent. The next year, they were looking to increase our 

rates 39 percent, and when we looked around for any comparable 

products from their competitors, they were even higher. So at that 

point we took a look at and really did a leap of faith knowing that 

our staff were both fairly young and fairly healthy, we went for the 

opportunity to self-insure ourselves, and we have been doing that 

since 2009. What I can say is that so far that has been a great decision. We have saved over that four-year period roughly $400,000 

compared to what we would have paid for our insurance premiums. 

And that is about a 19 percent savings. What we did with that savings, really, that allowed us to keep our benefits the same. We 

have a gold quality insurance program and we have kept that affordable for our employees. 

When I look at some of the benefits that self-insurance can help 

with small business, first, obviously, there is an opportunity to save 

costs. Secondly, whenever you give an entrepreneur or business the 

opportunity and the information that is provided, you give them an 

opportunity to get responsible for those costs and accountable for 

those costs. And so self-insurance allows for some transparency on 

the healthcare costs that these businesses are incurring. This allows them to cater, and self-insurance allows for the flexibility to 

change their plans pretty much on the fly to adjust their plans for 

efficiency and also in some cases to reduce costs. What self-insurance also does, it allows and gives great incentive for small businesses to invest now in education and incentives that help improve 

overall efficiency of their programs. As a businessman, I can say 

that such investments usually you would not go and invest in such 

incentives when the benefit may turn out to be your fully-insured 

provider. Here we are looking at mitigating future costs by providing incentives for people to first go out and get physicals yearly, 

and also we provide incentives for them to lead healthy lives. That 

means checking your cholesterol, blood pressure, not smoking, 

keeping a healthy weight. And it is truly these self-insurance plans 

that allow us the flexibility to really kind of cater our programs to 

the needs that we see in our employees and also that we see coming up through the data that we are reviewing. 

I thank you and look forward to contributing in any way. I look 

forward to your questions. Thank you. 

Chairman COLLINS. Thank you very much. 

I would like to now yield to Ranking Member Hahn for introduction of our next witness. 

Ms. HAHN. Thank you, Mr. Chairman. 

It is my pleasure to introduce Dr. Linda Blumberg. Dr. Blumberg 

is a senior fellow at the Urban Institute’s Health Policy Center. 

Her recent work includes a variety of projects related to the analSBREP-219 with DISTILLER

9 

ysis of health reform and state implementation of the Affordable 

Care Act. Dr. Blum berg serves as a senior advisor for the institute’s Health Insurance Policy Simulation Model, and is also a 

member of the Health Affairs Editorial Board. 

Welcome, Dr. Blumberg. 

STATEMENT OF LINDA J. BLUMBERG 

Ms. BLUMBERG. Thank you very much. 

Mr. Chairman, Ranking Member Hahn, and members of the 

Committee, I appreciate the opportunity to testify before you today. 

The views that I express are my own and should not be attributed 

to the Urban Institute or its sponsors. My testimony draws on my 

own and my colleagues’ analysis of the ACA, some of which rely on 

a 10-state case study effort of ACA implementation which the 

Urban Institute continues, along with our colleagues at the Georgetown University for Health Insurance Reforms, and some of which 

relies on the Urban Institute’s Health Insurance Policy Simulation 

Model, HIPSM, a micro-simulation model that estimates individual 

and employer responses to specific provisions of the law. 

Our analyses lead to the following main conclusions. Changes to 

small group insurance under the ACA intended to broaden sharing 

of healthcare risk across firms. An increased premium stability and 

access to insurance do not in general apply to self-insuring firms 

regardless of size, nor do they apply to private stop-loss policies, 

the product that makes it feasible for small firms to self-insure. As 

a result, small, young, and healthy firms will have increased incentives to self-insure once the ACA’s reforms are fully in place, possibly trying to move between self-insurance and healthy years and 

fully-insured products and less healthy ones. 

However, stop-loss policies combined with the self-insurance approach itself carry substantial financial and legal risks for small 

employers. As such, sales of stop-loss to small firms are relatively 

uncommon today. In fact, many sources in our case study were 

from the insurance and producer communities felt it was irresponsible to market stop-loss policies to small firms. However, we are 

seeing increasing marketing activity by reinsurers since passage of 

the ACA, including the emergence of bundled products which combined stop-loss coverage with administrative services. Many traditional insurers report that they do not want to get into this business, but if they see their traditional products being undermined 

they will have to participate as well. 

While some states, for example, Colorado and Rhode Island in 

2013, continue to pass laws due to the risks involved. In the vast 

majority of states, stop-loss coverage is not regulated like insurance, and as such, the policies can be denied to small firms outright due to their health status, are not required to cover specific 

benefits, are not guaranteed renewable, and can charge premiums 

based upon the claims experience of a particular firm with reunderwriting occurring frequently. 

Reinsurers can also include lasers that exclude coverage for the 

expenses of a group’s highest cost or highest risk members. Stoploss policies may not pay claims until the end of the first quarter 

after the plan year ends, leaving small financially vulnerable firms 

to pay all incurred claims upfront. Small employers may be wholly 

SBREP-219 with DISTILLER

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financially responsible for claims incurred in a plan year but filed 

after the end of that year once a reinsurance policy ends, leaving 

the employer exposed for large dollar amounts not anticipated. 

Significant increases in self-insurance also pose substantial risks 

to those small firms wishing to remain in the fully-insured market, 

an issue that has led some states to prohibit the sale of stop-loss 

to small firms. And due to these risks, in 2012, an actuarial subgroup of the NAIC recommended changes to their model law which 

would set the attachment point or deductible for stop-loss coverage 

at a minimum of $60,000 per insured individual. Our micro-simulation analysis finds that their suggested parameters would, in fact, 

dissuade the vast majority of small firms from self-insuring. Under 

this approach, average premiums in the fully-insured small group 

market would be lower than under a scenario with looser stop-loss 

regulations or none at all. If these recommendations were implemented in a uniform manner nationally, the fully-insured small 

group market would be roughly one and a half times as large and 

the average fully-insured small group premium would be 20 to 25 

percent lower than if reinsurance effectively acts as unregulated insurance. 

To conclude, self-insurance and unregulated stop-loss coverage 

carries substantial risks for small employers who are often already 

financially vulnerable and frequently ill-equipped to take on the 

additional financial and legal risks associated with it. It also carries risks of undermining the ability of other small firms to purchase affordable coverage for their workers in the fully-insured 

market. A majority of states do not regulate the sale of stop-loss 

insurance today, and many of those that do regulate it require minimum attachment points well below recent actuarial recommendations. 

In addition, we were unable to identify even a single state that 

currently monitors the sales of these policies to small firms, and 

only one that has plans to begin doing so. The Federal government 

could intervene, prohibiting the sale of stop-loss insurance to small 

employers, requiring its sale to small employers be regulated by 

small group rules, or setting minimum attachment points consistent with the new recommendations. At a very minimum, the 

Federal government can develop and implement an effective plan 

for closely monitoring increases in small firm self-insurance nationally and by state. Given the magnitude of other tasks and time 

pressures, states are not inclined to do so on their own, which 

means that in the absence of a concerted federal effort, states will 

be unprepared to intervene as warning signs increase the time at 

which major market disruptions could more easily be avoided. 

I am happy to answer any questions that you might have. 

Chairman COLLINS. Thank you to all the witnesses. I think we 

can have some very interesting questions. Ms. Hahn and I tend to 

run our hearings a little different than most. Instead of going first, 

which you find with many chairmen and ranking members, we like 

to go last. Our fellow members have busy schedules and so I will 

defer, as she will, to our fellow members here and then we will 

bring up the rear. 

So with that I would like to start with the Congressman from 

Colorado, Mr. Coffman, if you would like to ask some questions. 

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Mr. COFFMAN. Thank you, Mr. Chairman. I think this is—certainly having been a former small business owner, that this is a 

very important hearing given all the changes to health insurance 

in America right now under the Affordable Care Act, better known 

as Obamacare. And I would like to ask each of the panelists to, if 

you could, answer relatively quickly, but to basically say under the 

pressures of the Affordable Care Act, do you think that self-insurance will grow under—in this new environment as a mechanism for 

small businesses to afford health insurance for their employees? 

Start with you, Mr. Ferguson. 

Mr. FERGUSON. Sure. Thank you, Congressman, for the question. 

To answer that, I think our view would be that we would predict 

a continued growth in the marketplace, although that growth will 

probably be somewhat moderate just because for reasons that some 

of us have talked about already, stipulated self-insurance is not the 

best choice for all companies, particularly small employers. For 

some it is a great choice. But what we are seeing in the marketplace, there is a lot of companies that are looking more at self-insurance, and as part of that process to evaluate whether that 

choice is right for them, many of them as they sort of go through 

the process realize, well, this may not be the right choice for us so 

they do not go forward with that. But for companies that they have 

the financial viability, they have the sophistication to pursue this 

funding method, it is a good choice. So for that reason, since there 

is more interest generally, I think you are going to see a continued 

growth. But again, I do not see it as a wholesale migration. I think 

you are just going to see more companies gradually shift into the 

self-insurance marketplace. 

Mr. COFFMAN. Thank you. 

Ms. Frick. 

Ms. FRICK. I agree with Mr. Ferguson. I do not know that it 

would actually explode as far as all of a sudden vast rush of people 

to come in to self-fund. The growing interest does not necessarily 

equate to a growing number of new self-insurance or stop-loss policies. Just as Mr. Ferguson indicated, you will have more people 

that are looking into it, doing the math, and as insurance professionals, that is our job, to help them determine the risks and advantages of every kind of funding mechanism available to them. So 

the increased interest is in something that is now newer to them 

than there has been before or rather may be available to them than 

it has been before. You still see reinsurance carriers that would 

provide the stop-loss behind it still a little hesitant to come down 

into the market of under 100 or under 50 just because that market 

space is typically not very self-funded friendly from a risk standpoint. 

Mr. COFFMAN. Mr. Faria. 

Mr. FARIA. I guess my answer would be I hope so. But I belong 

to an organization called the Young Presidents Organization, and 

in that organization we have had numerous talks about self-insurance, and actually, literally, one of the topics was about how to respond to Obamacare, and they were actually pointing towards selfinsurance as a way to potentially mitigate the unknown costs that 

Obamacare may cause in terms of increased fully-insured preSBREP-219 with DISTILLER

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miums. I think right now, especially right now, when you are looking at a situation where the fully-insured providers have an unknown, certainly with this website problem and other issues, and 

of course, the issue here with people losing their coverage, they are 

not quite sure what the premiums are going to be going forward. 

And I think right now self-insurance might be a great option for 

some people to mitigate that potential liability of increased fullyinsured plan premiums. 

Mr. COFFMAN. Thank you. 

Dr. Blumberg. 

Ms. BLUMBERG. Because under the Affordable Care Act price 

discrimination based on health status of a small group is prohibited 

nationally for the first time, the self-insurance becomes a more attractive option for firms that have healthier than average risks in 

their firm. And so we do expect there to be an increase in self-insurance as a consequence barring other intervention, either federally or at the state level. 

I will mention to you that in terms of the uncertainty that one 

of the witnesses was mentioning, the issues with the website are 

very strongly unrelated to the vast majority of the small group insurance market which will continue to, in the fully-insured market, 

buy through brokers and agents as they have in the past with some 

percentage going through the exchange. But the markets are 

merged between the exchange and the non-exchange small group 

market. And so anything that creates a segmentation of risk between the self-insuring firms and the fully-insured firms affects the 

entire small group market. 

Mr. COFFMAN. Thank you, Mr. Chairman. I yield back. 

Chairman COLLINS. Thank you. 

At this point we would like to yield five minutes to the Congressman from Oregon, Mr. Schrader. 

Mr. SCHRADER. Thank you, Mr. Chairman. And I appreciate 

the tone of the hearing if I may say so. It is a great idea, great 

topic. I am curious myself to see how this may or may not work 

out for businessmen and women around the country. So I really appreciate it. 

First, I guess to Mr. Ferguson, if you could elaborate why you do 

not think this is a loophole in the ACA, and then you first comment 

on how this stop-loss works. It seems to me small business to me 

is something under 50 employees, and you are one catastrophic 

event away from losing your business if you do not have big cash 

reserves. How does that stop-loss really work? I would ask Ms. 

Frick the same question in a minute. Why is it not a loophole and 

why is this remotely possible for small business? 

Mr. FERGUSON. Sure. I am glad you asked that question, so let 

us explore actually both of those variations. 

The issue about the loophole is that there is concern or express 

stating that somehow self-insured plans are these unregulated entities that are out there and are sort of operating in kind of the 

Wild West. But, the fact is if you put a finer point in it, what we 

are really looking at in this discussion is what is the trend. Employers that are moving to self-insurance post-ACA. And by definition, those plans would be non-grandfathered self-insured plans. 

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fathered self-insured plans. So all of those plans that are moving 

to self-insurance would be non-grandfathered plans, and as such, 

they are subject to almost all of the regulations under the ACA. 

There are a few. There are about three or four that they are not 

subject to, and there are particular reasons why they are not applicable to self-insurance. Because essentially, self-insurance plans 

are the equivalent of nonprofit health plans. They are not in the 

health insurance business. They are widget manufacturers. And so 

in addition to that, not only are they regulated by the ACA, they 

are also regulated by ERISA. Also, HIPAA, COBRA. There are all 

these other federal laws that apply. So if you are going self-insured, you are actually subjecting yourself to more regulation, not 

less, if you are looking from a business owner standpoint. 

Now, to your question about stop-loss insurance, distinction between stop-loss insurance and health insurance. Stop-loss insurance is essentially a liability-type of insurance product between the 

carrier and the employer. A stop-loss insurance policy does not 

cover individuals, it does not pay claims, and so there is a distinction that you need to keep in mind whereby you have got the plan, 

the self-funded plan, and you have the participants within that 

plan. And those participants are in the plan, they get coverage 

under the plan, no matter what the stop-loss insurance arrangements are. The stop-loss arrangement is simply a reimbursement 

mechanism between the employer and the carrier. So the fact, any 

of the arrangements of the stop-loss does not affect the plan participants, whether there is a laser, which means that the employer 

retains liability for one or more people under the plan not subject 

to liability. It is simply a reimbursement mechanism. So that is a 

financial tool that the employer uses and really has nothing to do 

with the healthcare, per se, delivery for the plan participants. I 

hope that addressed your question. 

Mr. SCHRADER. And then, Ms. Frick, if you will chime in. So 

what does it cost? I mean, if the stop-loss companies are willing to 

assume that ultimate risk, you know, I have got only so much cash, 

my employee develops cancer, has this catastrophic crippling injury, you know, I do not have enough money to pay that, that is 

the reason I got you as a stop-loss insurer or backstop. What does 

it cost me to have you do that and what caveats do stop-loss companies put in to make sure they are not on the hook? 

Ms. FRICK. Very good question. 

With a stop-loss arrangement, self-funding, either you are going 

to assume everything without the backstop or reinsurance, or you 

purchase reinsurance just as you said to cover your more catastrophic risk. So rates are determined just as you would in a fullyinsured market from the reinsurance but without the medical 

piece. The medical piece is added in after when you are looking at 

your specific medical claims experience and how you can turn that 

forward for your expected, and then the maximum liability over 

that next plan year. 

So in the reinsurance piece, you are still taking into consideration the size of the group, the demographics, the area factors, 

where it is, and just the cost of what you are needing to cover. And 

then, how large of a deductible do you want on each bellybutton 

that is covered on the plan. And then if you are in that size market 

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of say 1,000 or less, you are going to want the extra aggregate protection that protects collectively all of the bellybuttons in the plan. 

So you have one on each and one as the whole. 

So in that perspective there is always—you have to take all of 

that in to develop some kind of fixed premium cost that is a known 

factor over the 12 months. Your claims, you do trend out and expect where they will be. It is safe to put a corridor so you have a 

maximum liability to which you maximum would pay out, say 

about 125 percent of where you expect your claims will fall, but the 

reinsurance provides, if I set a deductible on each bellybutton as 

$10,000, then after that $10,000, my plan is reimbursed by the reinsurance carrier for anything over that expectation. So there is a 

cost factor. The reinsurance carrier is looking at everything, looking at the claims experience, what has happened before. 

Now, what is interesting is if you are moving in typically that 

small group market under 100, you do not get the claims experience, or if you do, it is very aggregated. It is not very specific as 

we have known in the past. So now it is not a guessing game but 

you are looking at a whole market or a pool in and of itself. So now 

you are having to determine across a broad spectrum what do I believe for this area, for this type of industry, for these kinds of workers, where should we place the deductible level? What do we expect 

out of them? An oil rigger is going to have a much higher risk factor than someone who sits behind a desk every day. So those are 

all taken into consideration. But the reinsurance does provide sleep 

insurance. I know at night that my total exposure is X. I know if 

I have an aggregate coverage that my total as a plan is X and there 

are reimbursables. As was noted earlier, just totally crippling 

someone, it does just help to have that something in the background. 

Mr. SCHRADER. Sure. Thank you very much. 

I yield back. Very helpful. 

Chairman COLLINS. Thank you. 

At this point we would like to yield five minutes to the Congressman from Kansas, Mr. Huelskamp. 

Mr. HUELSKAMP. Thank you, Mr. Chairman. I appreciate the 

opportunity to visit here and learn much more about this topic. My 

first question would be for Ms. Frick. Thank you for being here. 

How many years of background do you have in this industry and 

your education that qualifies you for your current position? 

Ms. FRICK. Sure. So I have been in the industry ever since I 

graduated from college basically. So a little over 14 years ago. 

Mr. HUELSKAMP. Two years ago? 

Ms. FRICK. Yeah, about five. Thanks. 

And I have been active—just from the perspective, I started— 

when I started my career I started out with an insurance consulting firm and just started asking a lot of questions and moved 

from the small group space and fully-insured into our client-size, 

the middle market space, starting to get a mix of self-funding, and 

then to a larger self-funded market space. I was curious. I asked 

a lot of questions. I like to learn, and if I need to educate you about 

it, I need to know what I am talking about. I worked with a managed care company for a year so I had a very interesting and indepth look on the inside from how an HMO self-functions. I had a 

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very good relationship with the underwriting actuarial departments, so I really understand how rates are calculated. What is the 

value of a co-pay? What is a value of the deductible and the outof-pocket. And from then, back on the consulting side. 

Mr. HUELSKAMP. Last week in a hearing, for instance, the 

HHS secretary did admit a felon could serve as a navigator potentially. How comfortable would you be to call up a navigator or visit 

with them in order to make your healthcare decisions? 

Ms. FRICK. Honestly? 

Mr. HUELSKAMP. Yes. 

Ms. FRICK. Not comfortable at all, unless I knew that they were 

a licensed, regulated entity that had to conform to continuing education as we have to or a required number of hours every two 

years. And we are subject to market conduct and are held legally 

accountable for what we do, what we say. We carry E&O insurance. We have, you know, for any claim against us. I want to know 

that the claim that I am talking to on the other line knows exactly 

what I am talking about or asking the questions for. I appreciate 

if someone does not know and is honest and says I do not have that 

answer but I will find out for you, but I would much rather if I am 

making a big healthcare decision, just as an employer or as an individual, this is your number two for an employer payroll. This is 

the number two list on your accounting statement. You have got 

to know who you are talking to and who you are dealing with and 

they are going to be able to be objective in helping you determine 

what is best for you. 

Mr. HUELSKAMP. Well, thank you. I share that concern as well 

and hear that from constituents worried about instead of the agent 

they usually rely on or the folks that help manage their account 

at their employer, just worried about a navigator, untrained, perhaps for a month, not even that. No insurance. I had not even 

thought about that. I mean, that is just a basic requirement of the 

agents. 

The second question would be for Mr. Ferguson. I am looking at 

a story from my district in Kansas, which is about the middle of 

the country, and a company by the name of Vortex Corporation. 

They work really hard. Their insurance renewal date just happened 

to be July 1st, and they worked really hard and made that requirement, did everything they needed to do, and then shortly thereafter 

the administration announced, you know what? We are just going 

to ignore the portion of Obamacare that says the business mandate. We are going to put that off. Other companies, were they in 

this situation? And what has been the impact of delaying that? I 

have heard various reports of what that has meant for businesses. 

If you could provide some light on that, Mr. Ferguson. 

Mr. FERGUSON. Well, I assume you are referencing companies 

that currently maintain a plan or determine whether to continue 

that plan through 2014. Is that the direction of the question? 

Mr. HUELSKAMP. Yes. In this case, the renewal is July 1st. 

Mr. FERGUSON. Right. 

Mr. HUELSKAMP. And they worked everything they could in 

the law and all of a sudden it was suspended for a year. 

Mr. FERGUSON. Well, what I can simply tell you is anecdotal, 

so disclaimer there, and the companies that I have spoken with is 

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that all of the companies that provide or are thinking of providing 

a group health plan, they have run the numbers so to speak. They 

have done the analysis in terms of whether they want to start a 

plan or maintain a plan, and they have probably reached some initial conclusions as to whether they want to play or pay. But most 

of those companies are taking a wait-and-see attitude, particularly 

the ones that are thinking about that they might drop the coverage 

and go ahead and pay because they are kind of waiting to see what 

exactly—how is the experience in the exchanges going to be. For 

instance, for companies that would be considering potentially dropping their coverage, one of the things that they are looking at is, 

okay, are the exchanges, are they going to be functional? Are they 

going to be effective? Because that is going to impact the decision 

of the employer. If they are thinking, well, if my assumption is that 

I could drop my coverage and there is a viable option for my employees and it is easy and you can get your affordable coverage as 

the law anticipated through the exchanges. That might influence 

my decision to go ahead and drop my plan. 

On the other hand, if there is uncertainty in the marketplace and 

the exchanges are not delivering on that promise, then that would 

sort of push them back to maintaining the plans. I think if you talk 

to most companies that are self-insured that have run successful 

self-insured programs, their preference is to keep their plans just 

because for no other reason it is a value to them. It is a value to 

retain and attract talent. So for those successful plans, they are inclined to keep them. But they have all run the numbers. They have 

all had their initial analysis. Most, if not all, will not publicly state 

what their intentions are but in some backroom they have a 

spreadsheet that shows all the different variations. And again, as 

I said, a lot of them are just sort of waiting to see how—obviously, 

there is a lot of uncertainty that is going on in the marketplace 

right now so they are kind of waiting to see how this all plays out. 

Mr. HUELSKAMP. All right. Thank you, Mr. Chairman. 

Chairman COLLINS. Thank you. 

At this point we would like to yield five minutes to the Congressman from Missouri, Mr. Luetkemeyer. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Just a couple quick questions here. Mr. Faria, you have a plan 

in place and have been working with it for how long now? 

Mr. FARIA. We have been working with it for over four years. 

Mr. LUETKEMEYER. Four years. Okay. How has it been accepted by the employees? Do they like it? Do they have concerns with 

it? Mad at it? In love with it? Ready to go for some more? What 

is the story? How do they accept it? 

Mr. FARIA. Well, I think in a lot of ways it is seamless. We are 

just replacing kind of the backend of the insurance. So for some 

businesses, they can choose to keep everything the same. You 

might not even have to tell the employees. 

Mr. LUETKEMEYER. Does it help retention then by having, in 

your situation, a rather seamless transition to this new plan? I assume it does not hurt retention. 

Mr. FARIA. Right. I mean, I think as I stated in my testimony, 

the savings that we have gotten from self-insurance has allowed us 

to keep a high standard plan. We consider our plan, it qualifies to 

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be a gold standard plan. We have also been able to keep that relatively affordable for our employees. And so for us we are using our 

self-insurance as a benefit for our employees to help us keep and 

retain our employees. 

Mr. LUETKEMEYER. Okay. Do you fund the program entirely 

or do you have a reinsurance stop-loss behind your plan? 

Mr. FARIA. Absolutely. We have a stop-loss. 

Mr. LUETKEMEYER. Okay. Very good. 

Ms. Frick, you deal with lots of plans. I know that the bigger you 

get probably the more functional this becomes, the more of an option it becomes. How small does it get down to where it is really 

not an option or not something that needs to be considered or you 

need to just go ahead and let the insurance company take the risk? 

What has your experience been? 

Ms. FRICK. Obviously, the larger you are the more credible your 

claims experience is, which that being, it is more indicative of 

where you will be in the future. There is the one-in-five rule where 

one out of every five years you will probably tank, you will have 

a bad one, but for the most part you are going to run pretty well. 

The larger you get, it becomes a very predictable number. As you 

become smaller, your claims experience is less—there is more volatility just from the perspective that it is less predictable. When you 

are around about 100, 200 employees, you need to gain the time 

to have a plan in place to really see where your trend is going because just as was mentioned earlier, you can have the one that just 

blows the whole plan out of place but that one person in a smaller 

group is more damaging to that group than the one person in a 

larger group. 

Mr. LUETKEMEYER. What has your experience been with reinsurance? Do most companies have a stop-loss behind them or are 

there companies out there that just take the full risk and just let 

it fly? 

Ms. FRICK. Most will have reinsurance except when you find a 

very large employer with tens and thousands of employees that can 

really financially put it behind them. 

Mr. LUETKEMEYER. Do those companies that participate in 

this, is it more based on the revenue of the company so they have 

more cash flow or is to more based on the number of employees? 

Ms. FRICK. More on the financial perspective. What can I assume? What is my risk tolerance? 

Mr. LUETKEMEYER. And expense to put this money into—my 

next question is do most of them use a trust fund to put this into 

or do most of them just write a check out of their account whenever, you know, they just have a separate bank account and then 

just write checks out of it whenever something happens? 

Ms. FRICK. Sort of that. Both. They have a claims fund. So you 

set your employees—employees still have a premium they are paying, and you set that premium based on the claims and the administrative costs, just as you are in a fully-insured plan. You pay 

$100 a month in premium. That is encompassing the claims that 

have to be paid, the administrative fees that have to be paid all 

in one lump dollar. You do the same thing on the self-funded side. 

So from an employee’s perspective, I do not know the difference. I 

do not know the funding mechanism behind the plan. So the claims 

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dollars that you as Mr. Employer are withholding from my payroll, 

for example, are put into that separate fund. The administrator 

who is physically paying the claims since the request to the employers in the past however often that is—two weeks, one month. 

You have had these claims. Please send the check for this money. 

Mr. LUETKEMEYER. Okay. I am running out of time here. If 

one of you, probably Mr. Ferguson, I would imagine, could give me 

just sort of a thumbnail sketch of how this fits into the McCarranFerguson act. You know, basically states need to be in charge of 

health care, yet this comes under sort of an ERISA situation. So 

can you give us a thumbnail sketch on what applies, what does not 

apply, how this all fits together? 

Mr. FERGUSON. Sure. As you mentioned, the Employee Retirement Income Security Act is the controlling main federal regulation 

that governs self-insured health plans. So as a self-insured health 

plan, you are regulated under federal law by ERISA principally but 

then other laws also apply, including as I mentioned, many of the 

applications and provisions under the Affordable Care Act. The 

McCarran-Ferguson dictates that the business of insurance is regulated at the states. So we talked a little bit about stop-loss insurance carriers. The stop-loss insurance carriers are state-regulated 

entities. So you have the plan that is regulated by the Federal government, stop-loss insurance carriers are regulated at the state 

level. Does that answers your question? 

Mr. LUETKEMEYER. Yeah. That just adds to confusion. Thank 

you very much. 

Mr. Chairman, I appreciate your time. 

Chairman COLLINS. Thank you. 

Well, Ms. Hahn and I will now kind of jump in and try to connect 

some of the pieces. I guess, Mr. Ferguson, let me start with you because you are the Self-Insurance Institute. Just to be clear, an employee designs a self-insured plan. One thing that is a big thing, 

they do not, as I understand it, have to meet the eight or 10 minimum requirements of the ACA. If they choose to have a self-insured plan, for instance, that does not have a free gym membership 

or does not have maternity care or contraceptive coverage, they are 

allowed to do that. That is one of the three or four exceptions. Is 

that correct? 

Mr. FERGUSON. You are correct. They are exempt from the essential health benefits rule. But there is a longer answer. They are 

subject to the minimum value requirement that the plan has to 

provide minimum value for them to meet their employer mandate 

requirement as well as their plan participants to meet the individual mandate requirements. So it is sort of an indirect sort of 

regulation in terms of the composition of the quality of the plan. 

Chairman COLLINS. So, for instance, if a company had a religious objection to providing contraceptive coverage, they do not 

have to do it in a self-insured plan. But the point you are making 

is—I call it the 60 percent rule—their plan actuarial still needs to 

cover 60 percent of the expected costs that would be incurred. Is 

that what you are talking about? 

Mr. FERGUSON. That is correct. 

Chairman COLLINS. Right. So overall it meets the standards 

but not ‘‘one size fits all.’’ Each company can design the plan they 

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want, which I would like to think is what America should be all 

about. 

Now, today we have community-rated plans which a lot of small 

businesses are in. We have experience-rated plans, which obviously 

is what Mr. Faria had as a fairly large small company, 160 employees. He was experience-rated each year, and if somehow he had 

some unhealthy situations, his rates could go up, up, up. If you are 

that 25, 30, 40 employee company, you are probably in a community-rated plan. And then you have self-insured. And maybe now 

you throw the exchanges in. But is it fair to say then experiencerated, community-rated, self-insured are maybe the three big 

things out there? 

Mr. FERGUSON. I think that is one way to describe it. 

Chairman COLLINS. And Ms. Frick, if a company at some size, 

like Mr. Faria, he probably would not qualify for a communityrated plan. Is that correct? They are only going to take him on an 

experience rated plan, so each and every year they are going to say 

what happened this year, look back a couple of years, and then design the premium schedule which he could be fortunate it goes up 

1 or 2 percent or he could have a bad year and have it go up 30? 

Ms. FRICK. Typically, the under 100 group size is where you are 

put into that community-rated pool. But when you get over the 100 

you start jumping out of the pool. 

Chairman COLLINS. All right. So that brings my next question. 

As companies, and actually, I am looking at this in a couple of my 

businesses, on the stop-loss, I do not think any small business 

owner would ever enter into this without stop-loss. So, and I am 

sure this may vary state-by-state, location-by-location, but is there 

a point at which somebody wants self-insurance but they cannot 

get stop-loss? What would that employee, you know, like if you had 

25 employees, could it be if I hired you to go find me self-insurance 

you might not be able to get a competitive stop-loss quote? But if 

I had 80 or 100 I could? And is there any generalities there? 

Ms. FRICK. You are right. I mean, that is a fair statement. Because the reinsurance carrier is still looking at they are assuming 

some risk at some point in time. So how much is it going to cost 

them on that small group when there is not going to be a lot of 

premium per se to come out. 

Chairman COLLINS. Is there a number, like, one thing we 

hoped to get out of the hearing is—and I am going to talk to FOX 

News today, is maybe some generalities. Is it 25? Is it 50 employees? Is it 75? Because there may be—there are a lot of people looking at options but we do not want to mislead someone that has got 

10 employees who think they can do a self-insured plan and actually get a stop-loss. 

Mr. FERGUSON. That is a great question. It is an obvious question. And the answer is a little less precise. And the reason for that 

is as we talked about—now, self-insurance, the larger you get on 

the continuum, you are more likely to be a viable candidate for selfinsurance. So by converse, the smaller you are, the less likely. But 

you cannot just look simply at the employee size. As we talked 

about a little bit earlier, to a large extent is a balance sheet. It is 

a financial decision. And so you may have—let us just take an example—you may have a law firm that has 30 or 40 attorneys that 

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is cash rich, that has a fairly stable workforce that has the financial wherewithal to self-insure. And they may be a great candidate 

to self-insure. Look at the opposite way. You may have a much 

larger employer that is really having challenging—does not have 

much cash reserves. They are a larger employer. They may not be 

viable for self-insurance because of their financial condition. So it 

is tough to sort of pin down an exact number. It really is, again, 

the smaller you get on the spectrum it is certainly more difficult. 

But to the extent that again you are strong financially—and the 

other component, too, is, I make the point, is the successful selfinsured companies are largely the ones where the principals, the 

owners, the executives of those companies decide they want to take 

ownership of the plan. They want to roll up their sleeves and make 

the plan work. Because one of the advantages of self-insurance is 

you have the ability to really customize your plan and really make 

it work well, but it takes some effort. It takes some time. Your executives are going to have to reserve some time. They are going to 

have to meet with their business advisors. They are going to have 

to evaluate different things that they want to incorporate as part 

of their program. 

So if you have a corporate culture, such as Mr. Faria and his 

company, where the senior executives are saying, hey, healthcare 

cost is a high-ticket item on our P&L, we want to do something 

about it. We understand we are going to have to commit the time, 

and they do that. The smaller firms can be successful again if they 

have the financial wherewithal. But the opposite is true. If you are 

a small business owner and you are just looking at this I just want 

to save costs but I am not willing to put the time in, do not do it. 

It is not going to be a good investment for you. 

Chairman COLLINS. So, Ms. Frick, I have got 75 employees. I 

am in a community-rated plan, not experience-rated. I am really 

worried about what my insurance costs are. It is now whatever 

today is, November 14th or whereabouts, and I have got a short 

time to make a decision. So I come to you and I say I really want 

to explore self-insurance as opposed to my community-rated plan 

that I am offering. What do you do? Could you walk us through 

step-by-step like the actuarial calculation? You call an insurance 

company. How do I get stop-loss, et cetera, et cetera. What do you 

bring forward as far as a network, you know, renting a network, 

having a network, the blues, getting to. What does the employee 

seek because he used to a Blue Cross Blue Shield card or some 

other HMO. So walk us through someone like me coming to you 

saying I do not know anything much about anything. How do I get 

started? Where do we go? And what is the timing? 

Ms. FRICK. Okay, sure. 

So first, we take your census of eligible employees with all their 

demographic data—age, gender, zip code—so that you can do—— 

Chairman COLLINS. Number of family members, et cetera, et 

cetera? 

Ms. FRICK. Who is covered under the plan. Then take if any 

kind of experience is available, even on an aggregated basis. Take 

that information into consideration. Take your current plan design. 

Call up reinsurance markets. There are a lot of them. And market 

it. See who bites, who does not. There will be reinsurance carriers 

SBREP-219 with DISTILLER

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that say no, this is not a risk area based on the industry or the 

size that we want to take a look at. There are others that are willing to take a harder look. So we get that information back, look at 

the contract basis, the time period meaning are there claims incurred within 12 months but then paid out in 12 months, 15 

months, 18 months. Take a look at the administrators that you 

have available. Not every third-party administrator will pair with 

a reinsurance carrier, for example, so you have to make sure that 

they match. Then who is the pharmacy benefit manager that I 

want in there? What is the PPO network that I can rent? A lot of 

times with third-party administrators, they can bring those pieces 

to the table for you, but certainly, in a self-funded arena you have 

the option to put together those pieces and parts that work best for 

you. 

On the other side, with market innovation, instead of going 

straight over to the self-funded side, maybe we look at a hybrid. 

Look at something that looks and smells and is self-funding but 

still appears or still can function as fully-insured from a premium 

payment perspective. For example, there are a couple of national 

carriers out now that have come out with something that is like a 

level funding plan. So it is self-funded. There is ASO administrative services in there. There is reinsurance. All the pieces and 

parts, but they set a fixed dollar amount every month as far as premium payment versus that little volatility you will get in a claims 

payment from a truly self-funded plan. It is a fixed dollar amount. 

So at the end of the contract period, take a look and see, okay, if 

I paid less in premium than was paid out in claims, then I have 

the opportunity to receive a portion of that back. I keep it. It is 

mine. In a fully-insured market, I am sure you all are aware that 

if I pay less in premium that the carrier paid out in claims, they 

keep the money. It is their win. In truly self-funded, that is all my 

money back. 

So this hybrid gives the opportunity for them to get a percentage 

of it back, so a split, for example, with the insurance carrier. Now, 

on those times when the employer pays more or more claims are 

paid out than premium is received, obviously there will be adjustment for the next time period to account for claims and expected 

risk going forward. So it makes a little bit of an easier transition, 

so it is more stable month-to-month versus the volatility of this 

month I have 25,000 in claims, next month I might only have 7 and 

the next month there is 17. It gives some more stability to that employer of that 7,500, 150 space. 

Chairman COLLINS. All right. So now how long does this take? 

I call you today. When can you come back at me? Does this take 

a week, a month, two months? What would you say? 

Ms. FRICK. I would like to do it in two weeks or less. 

Chairman COLLINS. Okay. 

Ms. FRICK. My methodology has always been to have a 60-day 

lockout period and an agreement with a reinsurer. Meaning 60 

days before the effective date the plan is going to be set up, locked 

in, and if we are going to have a January 1, then we are going to 

make sure that by October 1st or November 1st at the very latest, 

we know what we are doing, who we are playing ball with, where 

the claims are going, who is the pharmacy benefit manager. 

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You pointed out a good illustration about everyone is used to 

their Blue Cross card or United Healthcare card and it has got that 

logo on it. Well, the cards that come out still have the logo on it. 

It still has a network attached to it. Now, maybe it says ABC administrator where the claims go, but the logo for the network is 

still there, the pharmacy benefit manager, such as an Express 

Scripts, Caremark is still on there. So it is still identified by the 

employee as theirs. The pluses in self-funding the employer also 

throws their log on there a lot of times because they are the ones 

that are responsible for the plan. 

Chairman COLLINS. Good. That is I think helpful as, you know, 

again, people are facing this. Right now, Mr. Faria—by the way, I 

am a fellow YPOer. I have been in a little bit longer than you. I 

graduated into once you are 49 years old you become a W, world 

president organization. So I am officially a WPOer but long-time 

YPOer. 

So you are, I am assuming, in a forum group? 

Mr. FARIA. I am. 

Chairman COLLINS. So just out of curiosity, eight or 10 guys, 

you all share your information monthly in confidence, but without 

breaking a confidence, I am just curious. How many of your fellow 

eight or 10 forum members are self-insured like you are? 

Mr. FARIA. That is forum confidential. Just kidding. 

No, I think there is about two of us out of the eight. 

Chairman COLLINS. Is it a discussion point that is pretty active 

right now? 

Mr. FARIA. A lot of the time. I think, again, as I had mentioned, 

YPO has done more call-out sessions for our entire chapter to discuss this point, but definitely—and we also have an individual who 

is affected by the medical device tax and he certainly has had some 

issues with that, of course. So from time to time it is a discussion. 

It is not immediately. I think right now everybody has already 

made their decisions on what they are going to be doing. We kind 

of planned ahead. 

Chairman COLLINS. So now yesterday I did meet with Mr. Ferguson ahead of time. He came in a little bit early. We were talking 

about the fact that you, as the self-insured now get some interesting information monthly or quarterly. You do not know which 

employee may have gone to the emergency room or which employee 

is on what particular prescription drug but you get active information, what your cost drivers are, in some kind of aggregated fashion. And as Mr. Ferguson was sharing, sometimes, because now 

you are bearing the cost, you could make changes in some way or 

another that would address to maybe incentivize healthier behavior. He gave me the example of maybe lowering a deductible to go 

to Urgent Care, raising a deductible to go to the emergency room, 

because you see, oh, my God, I have three employees that just went 

to the emergency room. They should have gone to an Urgent Care. 

Share with me as someone four years experienced into self-insurance how you have used that data to either have a healthier workforce or incentivize what we would call cost-effective user-driven 

behavior. 

Mr. FERGUSON. Certainly. You gave an example that was one 

of our true success stories. When we gained access to our data, we 

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do not usually look at it on a monthly basis and we are not reacting like that, but typically, we will evaluate it on a half-year basis 

or so. But when we first got our data and we compared the national norms, we realized that our employees were using the ER at 

a higher than national rate. We also were given information to realize that it was not actually emergency care that they were getting. So that these employees were really going to the emergency 

room for issues that really should have been handled by a physician. So we were able to structure our plan in a way to incentivize 

people to go to and get a physician. And the benefit of that is obviously I kind of look at it as a win-win-win. The overall plan wins 

because we are not spending—typically one ER visit for a common 

visit we are being charged $1,000. The business wins out because 

we are able to reduce that cost. I look at the employee now wins 

because they also have a lower cost but now they are developing 

a relationship with a physician. They are developing a history with 

that physician so that the next time that they come in it is not that 

they are just going up to some stranger in the ER. And so this 

starts to help promote healthy values. And then the other win of 

this is that the overall health system is now being used more efficiently. The ER is not being used to cure the common cold. A physician is treating that. And so the ER can be focused on more pertinent matters. 

Chairman COLLINS. So now, Ms. Frick, if you have a pharmacy 

benefits manager, a formulary, if you will, for your prescription 

drugs, a company could decide I really want—and really encourage 

generic drugs—so I am going to have a plan that has got a $5 copay for generics but if somebody wants to opt into the name brand, 

have a significantly higher, again letting the user make that determination, is that something that you could tailor into a self-insured 

plan? 

Ms. FRICK. Yes, absolutely. And then I would encourage on top 

of that to have lesser language so that you are paying the lesser 

of the co-pay or the retail price of the drug. So you are still encouraging people who need their prescriptions to fill their prescriptions. 

Still go get your $4 generics if you want to from the Wal-Marts, 

the Targets, but know that you are not going to pay any more than 

say if our plan has a $10 co-pay for generics, that is where your 

cap is. So it is still encouraging the healthy behavior. 

And I will say to a point on employees, when the employer is engaged in the plan and they take an active look at where there is 

spend, employees value the plan more. It does not matter if now 

I have to pay $100 to see the doctor whereas I paid $50 before, if 

they can see in other areas where the employer is really engaged 

and understands what is important to his employee population, 

then they are more likely to tailor their plan better and you will 

have the more effective measure and usage from the employees. 

They will stay out of the ER and go to Urgent Care or an afterhours clinic more than they were before. 

Chairman COLLINS. One last question. If I sign up and I go 

self-insured and a year in I got, you know what, I did not quite 

know what I am getting into, is it very easy or just automatic that 

you could drop that plan at that point and move back into a community-rated plan? 

SBREP-219 with DISTILLER

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Ms. FRICK. You can. However, you need to make sure that you 

have a run out provision for the claims that were incurred before. 

So you are either electing the terminal liability and the run out upfront or you are reserving the option to execute it upon the policy 

termination. You never want to jump in and out of self-funding and 

fully-insured, back and forth. From an employee perspective, they 

do not know how it is, as we said before, how the plan is funded, 

but from an employer and an administrative, that would be a 

nightmare. 

Chairman COLLINS. Okay. Before I go to Ms. Hahn to close, I 

notice that our Congressman from South Carolina has arrived. 

Mr. RICE. I yield my time. 

Chairman COLLINS. All right. I guess—— 

Mr. RICE. I yield. 

Chairman COLLINS. Oh, okay. He came to listen. Thank you. 

Mr. Rice, I appreciate you being here. 

Ms. Hahn. 

Ms. HAHN. Thank you. I have certainly found this a very interesting hearing. I have certainly learned a lot. 

Mr. Faria—is it Faria? Faria. You all have said it differently. 

Mr. FARIA. Faria. Yes. 

Ms. HAHN. So I am just curious about a couple things. Now, you 

talk about having a gold plan, which sounds admirable. How does 

that compare to what the Affordable Care Act is qualifying as a 

gold plan and the benefits that have to be offered? 

Mr. FARIA. To the best of my understanding, that is why I am 

saying gold. I am comparing it to an Obamacare gold plan. 

Ms. HAHN. Okay. So you, even though some of these consumer 

protections under the ACA do not apply to self-funded groups, you 

have decided to cover those? 

Mr. FARIA. Yes. 

Ms. HAHN. So you do not discriminate against someone who has 

a preexisting condition or being a woman. 

Mr. FARIA. Not at all. 

Ms. HAHN. Not at all. So that is admirable. 

One of the things I am interested in, and I do not know if Ms. 

Frick or Mr. Faria could speak to that, so when the reinsurance 

company is analyzing your company and determining what they 

would charge you, what are they looking at and what are they 

charging more for? 

Ms. FRICK. They look at the current plan design or the plan design that you have created. And every piece in part to that plan 

has an actuarial value. So there is a value to the plan itself, just 

as we know we have the minimum value at the 60 percent, so we 

all understand how that works. But then when they look at the potential risk or the health conditions—let us say it is a known factor, that we know what some health conditions are, there is a dollar amount that is associated with the cost of the care of those particular measures. And then further, has the employer or its administrator or a disease management company helped to take steps to 

mitigate some of those claims? For example, for diabetes management, I have put in a plan before where it was not opt in or out. 

First fill of a diabetic drug the patient was put into the plan. They 

were now followed by the nurse. I would rather pay more in pharSBREP-219 with DISTILLER

25 

macy costs as an employer than more costs for the medical part because you are going to pay—that person will have more medical 

problems over time if they do not control their disease and have 

disease management with healthier living, taking the required 

medications, have their timely A1 season, something of that nature. 

So the reinsurance carrier takes a look at everything so they 

have an understanding of okay, that employer has now decided 

that they are going to have a $50,000 specific deductible for each 

person on the plan. So where does that put me after the 50 for this 

employer, for the diseases or health conditions that are contained 

therein. Where does that place me? If I see that the employer is 

assuming more of the risk upfront on the first dollar, then that is 

better for me. I will reduce it a little bit. If I see that I will potentially take more on the backend from a reimbursement perspective 

and now I am funding that, then I am going to have to put some 

more into my rates. 

On the flipside, they can also laser, but a laser is just putting 

either a different contract on an individual or a higher specific deductible on that individual. They are not excluding them from having reimbursable claims. They are saying if my specific is at 50 but 

because Susie-Q’s specific—because of her conditions is now at 

100,000, then the reinsurer will start reimbursing after her 

100,000 claims and the employer has taken the first 100. They are 

not excluding her from coverage. They are not excluding her from 

reimbursable claims. They are just putting—— 

Ms. HAHN. What would be some examples of some laser contracts? 

Ms. FRICK. Kidney disease. End-stage renal failure. High dollar 

premature babies that have been born that it is obvious that they 

will have longer time for recovery, they will have multiple surgeries going forward. Those are typically the two highest cost drivers. 

Ms. HAHN. And do you have any laser contracts, Mr. Faria? 

Mr. FARIA. Yes, we do, actually. We had a situation where an 

individual has some cancer and they were lasered. I will say that 

the laser does add some risk to the self-insurance plan. You can 

have a situation where a person gets cancer and then the reinsurer 

comes in and says we are going to laser, meaning that their deductible now is let us say 300,000. I will say, however, that there 

are plans out there, and we have actually signed one now, that you 

can have a no laser contract so for an additional amount of money 

you can actually put forth and say that next year when we reapply, 

there will not be any lasers. 

Ms. HAHN. And does your employee who has been lasered, do 

you charge them more? 

Mr. FARIA. No. 

Ms. HAHN. No? 

Mr. FARIA. No, we do not do that. 

Ms. HAHN. So everybody pays the same? 

Mr. FARIA. Right. I mean, we have a tier based off of whether 

you are single or have a family. We also have a tier based off of 

how the person scores on the physical, their biometrics, how they 

are doing in improving healthy living. 

SBREP-219 with DISTILLER

26 

Ms. FRICK. I am sorry to interrupt. May I make a comment to 

your question about lasers and what employees pay? 

Ms. HAHN. Right. 

Ms. FRICK. The employee typically has no idea what their laser is. They see their plan benefit design. They see I have $1,000 deductible and a $20 office visit co-pay. The stop-loss deductibles and 

the lasering is on the financial funding side of the plan. So his employee that might have that $300,000 does not know that he is responsible for $300,000 of her first dollar claims versus 50 for mine. 

Ms. HAHN. Got it. 

So the other thing that was interesting was you having access to 

the data. Now, you do not have access to the individual employee 

and whether or not they went to the emergency room, or you just 

have a cumulative—— 

Mr. FARIA. Right. It ends up being cumulative. 

Ms. HAHN. But do you know who the employees are? 

Mr. FARIA. I would say that you do not have direct names. 

Ms. HAHN. You can figure it out? 

Mr. FARIA. Unfortunately, in a small business environment, you 

do know that a certain employee might have been out and to the 

hospital for a period of time and you will get claim data that said 

this particular surgery happened at that point in time. 

Ms. HAHN. Yeah, you know, I have been having an open mind 

about this but that part of it really would bother me as an employee. That is a real loss of privacy with your employer. It is one 

thing for your insurance company to have that information. It is 

another thing for your boss to know what is going on in your personal life and why or why not you have chosen to seek medical 

care. So that part bothers me. What do they feel about it? 

Mr. FARIA. Well, I think in a lot of cases, in fact, most of the 

cases, just the environment that we have created, kind of a family 

culture, in most of the cases—— 

Ms. HAHN. I would not want my own family to know when I go 

to the emergency room. 

Mr. FARIA. Yeah. I mean, we are hearing that information actually from the employee themselves so that it is not really a situation where we are finding out that through nefarious means. But 

I will have to say that is an issue. And just like everything, the 

wrong person with that information can make some bad decisions. 

But now we are talking almost like fraud or a HIPAA violation. 

Somebody has to really kind of break the law to really start utilizing that information. 

Ms. HAHN. Right. Except you are not a doctor so you have not 

really taken a Hippocratic oath. 

Dr. Blumberg, so in your report, Small Firm Self-insurance 

under the Affordable Care Act, you present a situation in which a 

stop-loss insurance plan would pay for all medical costs. The employers would bear no risk and the stop-loss insurance would essentially act as a traditional health insurance without several ACA 

regulations. Would you elaborate a little bit on that because I am 

getting sort of mixed messages here about what these stop-loss or 

these reinsurance companies actually are. Are they just reimbursement financial vehicles or are they, in fact, acting like health insurance? 

SBREP-219 with DISTILLER

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Ms. BLUMBERG. Sure. And I think the lines begin to blur a bit. 

And some of it is the increased incentives for these small firms to 

self-insure under the ACA without other action being taken. And 

the reason is that most states today do not regulate the definition 

of stop-loss insurance, and neither does the Federal government. So 

as a consequence, we are seeing more and more ‘‘attachment point’’ 

plans being issued. Some regulators in Michigan, for example, informed us that they are seeing not only more stop-loss policy forms 

being filed with regard to small firm coverage but with much lower 

attachment points, as low as they have seen $5,000. And so what 

that means is if there is no regulation that defines what stop-loss 

means, then you could sell—not that I am saying these folks do, 

but you could—others could sell a stop-loss plan with a zero dollar 

attachment point. And what that would mean is essentially it 

would act as unregulated health insurance. So if the employer that 

was self-insuring, for example, said I am going to have a $1,000 deductible plan, a zero dollar attachment point on a stop-loss plan 

would mean that the stop-loss plan would start to reimburse after 

the individual hit their $1,000 deductible. So when you do not define regulatorily what stop-loss is, then stop-loss can morph into 

whatever you want it to be. 

Ms. HAHN. In terms of what the self-insured employer has— 

what kind of plan they have created? 

Ms. BLUMBERG. Right. So the self-insured employer can decide, okay, as I used as an example, I am going to have a $1,000 deductible plan for my employees with a 15 percent co-insurance on expenses over that just to lay something out simply. 

Ms. HAHN. Right. 

Ms. BLUMBERG. And then they can go and buy a stop-loss policy that is going to internalize all of the claims that would come 

into the firm beyond what the individual is required to pay. But 

because it is referred to as stop-loss and it is sold by a reinsurer, 

then that means that the individual—the individual firm that is 

providing a self-insured plan to its workers, is not subject to the 

regulations, the premium rate regulations, the essential health 

benefit regulations, the actuarial value rules within the Affordable 

Care Act for other small fully-insured firms. 

Ms. HAHN. So if this—and I know in California, we have actually passed legislation that would prohibit stop-loss insurance from 

issuing plans with specific deductibles under $35,000 to small businesses with less than 100 employees. So do you think that kind of 

regulation is helpful? 

Ms. BLUMBERG. It is helpful. According to the actuaries at the 

National Association of Insurance Commissioners who have reevaluated the situation very recently, that $35,000, which is helpful, is still too low in terms of the level at which we want to dissuade more vulnerable small businesses from taking the self-insurance option. And while there are a number of regulations under 

ERISA to which these small self-insuring firms are subject, as was 

mentioned earlier, the issue is really that the specific regulations 

to which they are exempted from are precisely the ones that are 

changing the way that small group insurance is priced under the 

Affordable Care Act. So it is not so much the number of them as 

which ones we are actually talking about. And so that is important 

SBREP-219 with DISTILLER

28 

to keep in mind is that once you give people an out to the very 

rules that determine how risk is shared in a small group market, 

you can have a very significant effect. 

Ms. HAHN. And maybe for the whole panel, how do we strike 

a balance between the need to protect firms against unexpected 

costs and the need for an affordable method of insurance for small 

businesses, including small businesses that choose to go to the exchanges, and how do more self-funded and reinsurance combined, 

how is that going to affect small businesses going onto the small 

business exchange? 

Does anybody have—— 

Ms. BLUMBERG. Well, I can comment. There are very direct implications as our analysis showed for those small firms that want 

to buy fully-insured products. Once you have basically an outlet 

from the sharing of risk for potentially the healthiest and most financially valued firms. So if you have self-insurance and it is easy 

to go back and forth, even with some financial risk for the healthy 

small employers, the implications are that the average risk in the 

fully-insured market, which is both the exchange and outside of the 

exchange, the way that a lot of the small employers are buying already today, it ends up increasing their risk very substantially. So 

the idea is you can salvage the stability and the security of the 

plans and the average price of the plans that are expected to 

emerge in the new small group fully-insured market by limiting the 

number of small employers who would end up going into self-insurance either by increasing the attachment point at which they can 

buy stop-loss coverage or by prohibiting its sale for small firms. 

Ms. HAHN. Thank you. Thank you. 

Chairman COLLINS. Well, thank you. Let us see. It is 11:35 and 

the president is going on the air as we speak announcing that he 

is going to allow insurance companies to continue to offer plans 

that have been canceled. We will just see where that ends up, but 

I guess that is happening even as we speak. 

I want to thank all the members for speaking today. This testimony is very timely, and the issues are real. Certainly, Dr. 

Blumberg does point out that as small employers look to control 

their own costs, to control their own profits and their future, in 

doing so there could be a negative impact on the community-rated 

pools. But I would point out that happens today because the large 

employers are all self-insured. So when you really look at what is 

happening today, that segmentation of risk has happened in a huge 

way because any and all employers with over 500 employees are 

all self-insured. And so it is just a true statement as people peel 

out and they manage their own risk as Mr. Faria is managing his 

and understanding how to incentivize good behavior, going to Urgent Care instead of emergency rooms. As that happens, the pool 

of folks left in the community-rated pools may get more and more 

toxic from a standpoint of risk and hence, cost. But there is nothing 

perfect in life and I think small business exists to produce a product, to make money, to grow their business, create jobs, and anything we can do to help small business create jobs by controlling 

their costs is, in fact, the biggest benefit that we have and the biggest problem we have in this country today is a lack of jobs. So for 

that reason I know I am going to and the Committee will certainly 

SBREP-219 with DISTILLER

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be suggesting to someone—and I will pick the number, over 25 employees—to go out and take a look at self-insurance. It is not going 

to be perfect for everyone. Buyer beware as was also pointed out. 

Make sure you have got a good TPA. Make sure that TPA has got 

a good pharmacy benefit manager. Make sure that you understand 

your risk on the stop-loss piece, both individually and in the aggregate. And it is going to take time but I certainly, as it is mid-November, would encourage any and all companies. And as I understand it, many could do so and decide to kick it off on April 1st. 

When they sign up for community plan, generally they are not 

locked in. So again, I want to thank you all for coming. I think this 

was very timely and I, to the best of my knowledge, pretty much 

covered, crossed most of the Ts and dotted the Is. 

I will ask unanimous consent that members have five legislative 

days to submit statements and supporting materials for the record. 

Seeing no objection, so ordered. 

The hearing is now adjourned. Thank you again. 

[Whereupon, at 11:18 a.m., the Subcommittee was adjourned.] 

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A P P E N D I X 

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31 

INTRODUCTION AND EXECUTIVE SUMMARY 

Good morning Chairman Collins, Ranking Member Hahn and 

members of committee. My name is Mike Ferguson and I serve as 

President and CEO of the Self-Insurance Insurance Institute of 

America, Inc. (SIIA). I am pleased to join you here this morning for 

such an important and timely hearing. 

SIIA is a national trade association that represents companies 

involved in the self-insurance marketplace, including self-insured 

organizations and their business partners, mostly in the small and 

midsized market segments and represent both private employers 

and union-sponsored Taft-Hartley plans. 

My testimony this morning will address six general areas that 

should be of interest to the committee. 

• What is Self-Insurance and How Does it Differ from Traditional Health Insurance 

• Who Self-Insures 

• The ACA and Self-Insurance Trends 

• The Advantages and Disadvantages of Self-Insurance 

• Federal Regulation of Self-Insured Group Health Plans 

• Stop-Loss Insurance Overview and Marketplace Demographic 

WHAT IS SELF-INSURANCE AND HOW DOES IT DIFFER 

FROM TRADITIONAL HEALTH INSURANCE? 

Should an organization wish to sponsor a group health plan for 

its employees or members it has two basic options. The first option 

is to purchase a traditional group health insurance policy from a 

licensed health insurance carrier. Under this arrangement, the organization pays the insurance carrier a fixed premium and the carrier provides health care coverage to the group in accordance with 

specified policy terms. By choosing the traditional insurance option, 

the organization transfers the health care-related financial and 

legal risk to the carrier. 

The other option is to retain the financial and legal risk through 

the use of a self-insured group health plan. This is also known as 

self-funding. Under this arrangement the organization pays eligible 

health care claims as they are incurred, either directly like other 

business expenses or through a separate trust. Self-insured employers typically outsource claims administration functions and retain stop-loss insurance as a financial backstop for catastrophic 

claims. 

WHO SELF-INSURES? 

According to the 2013 Employer Health Benefits Survey, 61% of 

covered workers in private employer plans receive coverage 

through self-insured arrangements. Of more particular interest to 

this committee is that 16% of small employers with 3–199 workers 

are self-insured. This is up slightly from 15% in 2012. 

SBREP-219 with DISTILLER

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But self-funding is not limited to the private employer marketplace. It is estimated that there are about 1200 union-sponsored 

Taft-Hartley health plans serving a variety of industries and that 

more than half are self-insured. And again, of particular interest 

to this committee, many of these self-insured Taft-Hartley plans 

are small, with as few as 50 to 100 members. 

Given these statistics, it’s clear the topic of self-insurance is important to both the business and labor communities. And it’s also 

clear is that self-insurance is not simply a privilege for the very 

largest organizations. 

THE ACA AND SELF-INSURANCE TRENDS 

Now that I have provided this general background information, 

let me address a recurring question of what effect has the Affordable Care Act had on the decision process of smaller employers who 

may be considering self-insurance? 

Recent pronouncements by many policy-makers and pundits that 

by self-insuring organizations are able to bypass ACA regulatory 

requirements and operate health plans with little or no consumer 

protections are misleading. As my testimony will demonstrate, 

smaller organizations that choose to self-insure actually subject 

themselves to more regulation, not less. In this regard, we respectfully dismiss the conclusion by some that the decision to self-insure 

is influenced by the objective to ‘‘get out of Obamacare.’’ 

Rather, it is our view that the ACA is more of an indirect factor 

in the decision to self-insure for smaller organizations. This more 

nuanced conclusion is based on the belief that the primary motivating factor of most organizations that have or are considering the 

self-insurance option is that they want to take more control over 

the cost and quality of the health benefits they are providing to 

their plan participants over the longer term. 

While we will leave to other stakeholder groups to make broader 

statements about the merits of the ACA, we believe it is fair to say 

that the law has created added uncertainty in the health care marketplace and contributes to more acute cost fluctuations, at least in 

the short run. So in this current post-ACA environment, self-insurance does provide smaller organizations more certainty in their 

ability to be able to continue to provide quality health benefits 

along with will providing them better costs containment capabilities. 

Now that we have established the size and diversity of the selfinsurance marketplace and provided some general commentary on 

how the ACA has influenced this marketplace, let’s talk about the 

advantages and disadvantages of self-insurance in order to better 

understand how organizations must consider this plan funding decision. 

DISADVANTAGES OF SELF-INSURANCE 

It’s important to state right up front that self-insurance is not 

the right option for all organizations. Smaller organizations, in particular, should carefully consider what it means to be self-insured. 

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Financial Liability 

The primary consideration is that as a self-insured organization, 

you are responsible for paying all eligible health care claims incurred by plan participants. While stop-loss insurance provides for 

a limited reimbursement mechanism for higher cost claimants, the 

self-insured organization accepts all financial liability for the group 

health plans. Simply stated, if you are not prepared to cut checks 

to pay providers, you should not be self-insured. 

Legal Liability 

In addition to accepting financial liability, self-insured plan sponsors also subject themselves to significant legal liability. Plan fiduciaries (normally organization executives) are subject to civil and 

criminal penalties under the Employee Retirement Income Security 

Act (ERISA) to the extent that plans are not administered in the 

best interests of the participants. Simply stated again, if you are 

not prepared to understand and ensure compliance with applicable 

federal law, you should not be self-insured. 

Time and Focus Commitment 

While self-insurance allows plan sponsors more flexibility to deliver quality health benefits in a more cost effective way, sponsors 

commit the necessary time and focus to design and manage their 

plans in order to achieve the desired results. So the final simple 

statement is that if you are not willing to make this commitment, 

you will likely be better off in a traditional, fully-insured arrangement. 

ADVANTAGES OF SELF-INSURANCE 

There are many reasons why organizations conclude that self-insurance is the best health plan funding option, despite the considerations noted above. 

More Cost Effective Than Fully-Insured Plans 

A well run self-insured health plan is generally less expensive 

over time compared with the traditional insurance options. The 

‘‘over time’’ caveat is important because claims experience often 

varies from year-to-year. Traditional insurance premiums must account for the carrier’s marketing cost and profit margin, among 

other cost escalators that are not applicable to self-insured plans, 

as they are essentially not-for-profit health plans. 

Plan Design Flexibility 

Federal law provides self-insured plans greater flexibility in designing benefit packages that better meet the specific needs of their 

plan participants. For example, organizations with a predominately 

female workforce can structure their plans to incorporate more robust health benefits that would be utilized by female plan participants. Self-insurance plans can also structure more innovative reimbursement arrangements with health care providers. 

Improved Cash Flow 

Self-insuring allows claims to be funded as they are paid. Fully 

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suring, a plan pays health plan costs only after the services have 

been rendered. Insurers set health insurance premiums at levels 

that anticipate projected increases in healthcare costs—usually 

well in excess of the actual rise in costs. 

Ownership of Health Claims Data 

Health claims data is extremely valuable for plan design purposes. But under traditional insurance arrangements, carriers 

maintain that they own this data and employers cannot get access 

to it. By contrast, self-insured organizations have control over this 

data and can use it to help deliver benefits more efficiently and 

control costs. 

ERISA Preemption of State Regulation 

ERISA provides uniform regulatory stability to employers that 

operate in several states, so those companies do not have to adopt 

a patchwork of design variations to comply with various states’ requirements. This is particularly important for multi-state organizations. 

Incorporation of Value-Based Benefits and Wellness Programs 

As medical costs have skyrocketed, self-insured plan sponsors 

have been taking steps to reduce medical costs by emphasizing prevention and maintenance care for chronic diagnoses. Employees 

have the flexibility to design and integrate into overall strategies, 

health risk assessments, prevention and wellness programs tailored to the employer’s specific employee demographics and needs. 

FEDERAL REGULATION OF SELF-INSURED PLANS 

Some health care market observers contend that policy-makers 

should be concerned about employers switching to self-insured 

health plans and purchasing medical stop-loss insurance in order 

to ‘‘dodge’’ requirements and fees applicable to fully-insured health 

plans as provided for by the ACA. They further argue that such a 

trend will contribute to adverse selection and therefore compromise 

the viability of the health insurance exchange. 

SIIA believes this analysis is inaccurate based on a review of 

how self-insured plans are actually regulated and the recent findings of the RAND Corporation on this subject. 

For purposes of our discussion, we will focus on non-grandfathered self-insured plans, which by definition include organizations who have switched to self-insurance since the passage of the 

ACA. Non-grandfathered self-insured group health care plans, regardless of stop-loss insurance arrangements, are subject to almost 

all ACA health care market reforms, including: 

• Prohibition on annual & lifetime limits 

• Coverage of dependents up to age 26 

• Prohibition on discrimination based on preexisting conditions 

• Coverage of preventative services 

• Summary of benefits and coverage 

• Disclosure of plan transparency 

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• Right to external claims denial reviews 

• Limitations on waiting periods 

• Right to provider designations 

• Mandated coverage of emergency services 

Of the few ACA health care market reforms that do no not apply 

to non-grandfathered self-insured health plans, there are specific 

reasons why as follows: 

Medical Loss Ratio - As self-insured plans are essentially nonprofit entities with the fiduciary requirement to use plan assets for 

the exclusive benefit of the plan participants, there is no ‘‘profit 

margin’’ to regulate. 

Review of Rate Increases - Again, as self-insured plans are nonprofit entities and prohibited from using plan funds for any other 

purpose, sponsors have no incentive to increase rates any more 

than the rate of increase of medical claims and expenses. 

Essential Health Benefits - Existing federal law (ERISA) explicitly declares that self-insured group health plans should not be 

subject to state law. The ACA delegates the establishment of EHB 

standards to the states. Self-insured plans are subject to other federal mandates, so if Congress intended these plans to subject to 

EHB requirement the law would have been drafted accordingly. 

That said, self-insured groups health plans are subject by the 

ACA’s minimum plan value rules and cannot establish coverage 

dollar limits on benefits that are deemed to be EHBs. Finally, selfinsured employers have a significant human resource incentive to 

offer quality health benefits. 

Self-insured group health plans (grandfathered and non-grandfathered) are highly regulated by other federal laws such as 

ERISA, HIPAA and COBRA that existed prior to the ACA. Consumer protection requirements/mandates under these laws include: 

• Prohibited from denying coverage based on preexisting conditions 

• Prohibited from discriminating on cover based on health status 

• Mandated internal review procedures 

• Privacy protections 

• Plan fiduciary standards 

• Prohibited from rescinding coverage for non-fraudulent purposes 

• Continued access to coverage post job termination 

Will Self-Insured Health Plans Contribute to Adverse Selection 

With Health Insurance Exchanges? 

It is SIIA’s view that there may be many factors which could contribute to adverse selection among the federal state health care exchanges but the growth in the self-insurance marketplace is not 

one of those factors. 

In support of this view, RAND Corporation concluded in a 2012 

report that if small groups have the option to leave the insurance 

exchanges to self-insure, there would be no negative effects in 

SBREP-219 with DISTILLER

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terms of pricing for the remaining groups—no adverse selection 

would result. A key excerpt of the report follows: 

‘‘However, eliminating the option to self-insure does not substantially reduce premiums on the SHOP exchanges. This is because when self-insurance is not an option, most firms that 

would otherwise have self-insured decline to offer coverage rather than moving to the exchanges. This result is driven by the 

assumption that self-insured workers have low health insurance 

costs relative to wages. Although the majority of people who 

would otherwise have enrolled in their employers’ self-insured 

plans find coverage elsewhere, these enrollees are spread out 

across other employer policies, individual exchanges, SHOP exchanges, and Medicaid. As a result, they have little effect on the 

cost of premiums.’’ 

STOP-LOSS INSURANCE OVERVIEW AND MARKETPLACE DEMOGRAPHICS 

Stop-Loss Insurance Overview 

As referenced earlier in this testimony, virtually all smaller and 

mid-sized self-insured organizations retain stop-loss insurance to 

provide a financial backstop to guard against catastrophic claims. 

In this regard, I believe it would be useful to clearly explain what 

stop-loss insurance is and how it differs from traditional health insurance as it is more closely related to liability insurance products 

than health insurance products. 

Quite simply, stop-loss insurance provides financial reimbursements to self-insured organizations for health care payments that 

exceed pre-determined levels, known in the industry as ‘‘attachment points.’’ Stop-loss policy attachment points can either be for 

specific plan participants and/or for total claims incurred by the 

plan, known as ‘‘aggregate.’’ 

Unlike health insurance, stop-loss insurance does not cover individuals nor pay health care providers regardless of attachment 

point levels. It can only reimburse the sponsor or the plan for 

health payments in excess of the attachment point. 

Stop-Loss Insurance Marketplace Demographics 

Milliman released a report earlier this year commissioned by the 

Self-Insurance Educational Foundation (SIEF) highlighting key 

policy characteristics found in the U.S. employer medical stop-loss 

(ESL) market. The underlying policy data was provided by eight of 

the largest stop-loss carriers which collectively represent approximately 50% of the market. Milliman therefore assumed that the 

data is a reasonable approximation of the entire ESL market. A 

summarization of this data revealed the following: 

• Employers with 100 or fewer covered employees represent 

approximately one-quarter of the ESL market if the market is 

measured by count of employers. If measured by covered employees, however, that same segment represents only 2% of the 

ESL market. 

SBREP-219 with DISTILLER

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• Most ESL purchasers obtain both specific and aggregate 

stop-loss. However, employers with over 1,000 employees are 

more likely to purchase specific stop-loss without aggregate. 

Very few employers found in the underlying data purchased 

aggregate coverage without specific stop-loss. 

• The data included employers that purchased specific 

deductibles ranging from $5,000 to $2,000,000. However, 81% 

of employers purchased deductibles of $50,000 or greater. 

• The median specific deductible found in the calendar year 

(CY) 2012 data across all plans was $80,000. For groups with 

50 or fewer covered employees, the median deductible was 

$35,000. For groups of 51–100 employees, the median was 

$45,000. 

• Less than 0.2% of specific stop-loss policies had specific 

deductibles of $10,000 or less. About 0.3% of specific stop-loss 

policies were written with specific deductibles of less than 

$20,000. 

• The data included employers that purchased aggregate 

corridors ranging from 110% to 200% of expected claims. By 

far, the most common corridor (found on 90% of policies with 

aggregate coverage) was 125% of expected claims. 

CONCLUSION 

In conclusion, I would like to thank the committee again for this 

opportunity to provide input on the increasingly important topic of 

self-insurance and I look forward to addressing any questions you 

may have. Additional Information about self-insurance can be 

accessed on-line at www.siia.org. 

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House Committee 01'1 Small Business 

Subcommittee 01'1 Health and ,,,,,'nnll"ll£'.!>'u .... >;, ........ " 

November 14, 2013 

Self-Insurance and Health Benefits: 

An Affordable for Small Business? 

Thomas Faria 

President and CEO 

Sheffield Pharmaceuticals 
44 

INTRODUCTION AND EXECUTIVE SUMMARY 

Good morning Chairman Collins, Ranking Member Hahn and 

members of committee. My name is Thomas Faria and I am President and CEO of Sheffield Pharmaceuticals. I would like to thank 

you for this opportunity to speak with you today with regards to 

my experience on utilizing self insurance options to provide affordable health insurance to the employees of my company. I believe 

that self insurance can be a powerful option to help the right small 

businesses understand and control the continuously growing burden of health care costs. 

My Testimony this morning will address four general areas that 

should be of interest to the committee. 

• A brief background on Sheffield Pharmaceuticals 

• Sheffield’s experiences that led it to decide to self insure 

• Sheffield’s experience with self insuring 

• My opinion on and examples of the benefits of self insurance for small businesses 

COMPANY BACKGROUND 

Sheffield Pharmaceuticals is a family owned, mid-sized manufacturer of over the counter toothpastes, creams and ointments located 

in New London, Connecticut. Sheffield has a proud history of manufacturing in New England with the company originally being 

founded in 1850 by its namesake Dr. Washington Wentworth Sheffield, the man who is also credited with being one of the first inventors of toothpaste. For over 160 years Sheffield has strived to 

provide quality, affordable, domestic made health and beauty products to the American consumer. Today, Sheffield manufactures and 

sells over 22 different types of tubed drug products to every major 

retail and discount store chain in the country. Over the past decade 

Sheffield has grown to a company with roughly $30 Million in revenue and an employer of 162 workers. Sheffield provides health insurance to 75 of these employees and their families. 

SHEFFIELD’S DECISION TO SELF INSURE 

Like all big and small businesses, every year at the beginning of 

spring, Sheffield would evaluate its health care costs and send its 

health insurance plan out to bid to try to gather competitive 

quotes. While, every year a modest increase was expected, starting 

in 2005 the increases began to average over 10% per year. At times 

we would look to lessen the blow of this increase by either increasing the employees’ share of premiums or by cutting back on some 

of the benefits. This worked somewhat effectively until 2008. In 

that year, a small amount of employees in the company experienced significant health issues which drove our utilization up. In 

response, our existing health insurance provider increased our 

rates 25%. This was followed up in 2009 when our provider told us 

that due to our high utilization our rates would increase 39% while 

other providers quoted higher. The company began at that point 

earnestly looking at Self Insurance as a viable option. We weighed 

SBREP-219 with DISTILLER

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the potential positive benefits of being able to gain greater awareness and mastery of our total health care costs versus the potential 

negatives of not having a fixed cost to budget along with the potential for a catastrophic occurrence to severely impact our costs. We 

knew that, due to the relatively good health of our employees, the 

odds of having another high utilization year were very low. When 

we asked our insurance broker if he expected the insurance provider to reduce premiums following a better utilization year and he 

answered no, the decision to move to self insurance became an easy 

one for the company. 

SHEFFIELD’S EXPERIENCE WITH SELF INSURANCE 

While switching to self insurance provided a new set of challenges and has at times been a bit nerve racking in high utilization 

years, our decision to self insure has been a good one. Based on estimates of the yearly average increases that the traditional health 

care plans charged in Connecticut for plans of our size, we believe 

that self insuring saved the company over $400,000 over the span 

of four years (see exhibit A). This dollar figure amounts to roughly 

a 19% savings over the expected costs of insuring traditionally during this period. Our success with self insurance has allowed the 

company to realize savings which have allowed it to still provide 

‘‘Gold’’ caliber insurance coverage to its employees that covers 75% 

of the total health care costs, all while holding the overall costs to 

the employees in check. 

BENEFITS OF SELF INSURANCE TO SMALL BUSINESSES 

There are many benefits that self insurance can have for businesses that have the right conditions and mindsets to utilize it. 

First, as shown above, self insurance can have the ability to save 

individual business plans considerable costs. This however comes 

at the expense of having health insurance costs fixed for a period 

time. Secondly, it allows access to cost data that can show not only 

where a company spends it health care dollars but also allows for 

comparison against national norms. When a company knows these 

costs it becomes more responsible for them. Thirdly, this cost transparency can allow a business to develop its individual plan to educate and incentivize its consumer activities to most efficiently use 

health services, reducing both the business’s, consumers’ and overall health system’s costs. Finally, self insurance encourages companies to invest now in education, incentives for healthy6 living and 

preventative care to help promote long term healthy behavior 

changes in its workforce. This leads to better lives for their workers 

and hopefully can help stem off major and expensive health issues 

in the future. 

A perfect example of the benefits of the transparency that self insurance provides small business occurred when after a year of utilizing self insurance we examined our data on health costs. The 

data showed that our employees had a higher utilization of the 

Emergency Room than what should have been expected. Further 

analysis showed that some employees were utilizing the ER for non 

SBREP-219 with DISTILLER

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emergency care items that normally should be handled by a physician, who typically charges a quarter of what hospitals do. By 

doing this, not only were these employees unknowingly increasing 

the costs to themselves and the plan but also they were negatively 

impacting their future health by not creating a regular relationship 

with a primary physician. By adjusting our plan to incentivize employees to find and utilize physicians instead of the emergency 

room, Sheffield was able to use its health data in a way that reduced overall employee and plan costs while also benefiting the 

current and future health of its employees. 

As an example of how self insurance motivates companies to invest more into the health of its employees, once Sheffield had committed long term to being self insured, we established several programs aimed at educating and incentivizing healthy habits 

amongst our employees. Along with paying for yearly physicals, 

Sheffield also rewarded employees who received yearly physicals 

with reduced premiums. This allowed employees and their physicians an opportunity to develop a health history and address potential major health issues before they occur. In addition to the 

physicals, Sheffield has developed rewards programs for employees 

that work towards maintaining healthy biometric levels, including 

cholesterol, blood pressure, body mass index and smoking activity. 

By addressing these important health factors now we believe our 

employees’ future health can be dramatically improved. I do not believe that if Sheffield was in a traditional insurance plan we would 

have invested in these activities as the present day costs would 

have not translated into long term savings in a traditional plan. 

CONCLUSION 

In conclusion, I would like to thank the committee for the opportunity to speak with you on a topic that I believe can and should 

be an important part of helping solve America’s health insurance 

woes. 

Sincerely, 

Thomas Faria 

President and CEO 

Sheffield Pharmaceuticals 

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Insured Costs 
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BACKGROUND 

Health insurance plans offered 

employers pay 

burses providers for an agreed 
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IIEIUI.:rs 

Sllem~dl) A: IIMent R_mmlll~@ftlil of 

an NAle ActM.lal SlIbgrollP 
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FIRM SEl •• ·INstJRANCE 
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F'RM SELF-!'''U'''",CE 

Scenario C Sensitivity ARal)'llis: imployer 

Risk AverslOll 
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!O 

more than 10 percent if plans connparab!e 

allowed. 

Scenario C hftlliltl'llity AII81)'$ll!I: hlf. 

Insured "_fI with Lower Actuarial Valull< 

bear 
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them. 
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! !bld. 
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support from the Robert 

Ulldeltaking a comprehensive mO!lIit'Jrirlg 

alld effects of the Patient Protection 

2011 and will take 

on implementation 

case states be found at W1!rw.lW!r.Olll: 

component of the project is producing 

stal:e-spcCIllC reports on 

cX!lendttures, affordability, access, and premiums in the 

increasingly .. slablish 'seIHunded' health plaM, leaving 

Iha tradillonallully insured marl<a! 10 oblaln lower 

premiums and avoid markel ralorms und.r Ihs Affordable 

Car. Act Through 

study states. 

accessiblilly, .,lordabllily, and adequacy 01 pMva!a heallh 

Insuren"" "ovemge In the small group marko!. While 

these changes are intended to improve market conditions 

employers. Policy experts have speculat"d thatsueh cos! 

Increases-and soma of Ihe now r"gulalory standard.-

may encou,.go smallamployo,s to establish 'sellfunded" heallh plans and 

thus avoiding" numbsr of !he ACA's requirements. 

as modified community rating. coverage of essential 

heollh benollts. limits on cost sharing, and Ihe health 

Insur.r fee. How"."r. most small employer. would 

II also shOws Ihat slales have minimal dala on 

this potentially growing marke!, but they would be ""'II-

.erved to Imp,ovel",", monitoring ellorts s" thoy can 

Identify any increa ••• in omalt group self-funding and 

op"rat".iike rlOlnsu,.nce and 

by """lin, gender. and OIher laclors-Io help manage 

sell-funding. Thus. wh"ther 

affordabl" slop-los. oOV<lrage is r.adily av"lIable 10 small 

funding 

heallhier groups. a lan,e Incr",,,,,, 

caus. adverse selection llllainst the fully insu,ed small 

Including but not limited to, the small 

This pSp'" ",plor"" this premise through in-dopth 

'elophooo Interviews with small employer ",presentalives, 

producers (agants and brokers>, heallh Insure,s. stopincluding insurMce 
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regulators and exchange representatives in the 

participatlng in the Robert Wood Johnson Fo.Jndatk.n's 

monitoring and tracking prc.!acljP,let •• rr.a, 

Maryland, Michigan, Mlnneso!a, New 

York, O,egon, Rhoda 'sland, and Virginia), The auillors 

,eviewed sla!uleS, ,e9ulatioos and guidan"" ooros. 

10 slal"s and conductoo i"",M"II'" wi'lh 

This paper provld". an a .. "ssmant 01 theln/ormanls' 

perspective. on 1I1e curr""t and Mure markellor sm.n 

group •• II-fundlng and the sal. 0' stop-Io.s coverage, 

puny ins",.d heal!h plan 

Slop~o .. Insurance 

Self-lul1ding arrangement 

Aggrogat. olt.chmant point 

An agent or a broker, 

employsr. currsnlly covered under slop-loss pollcl<l. 

and Ihe aUachmMt point. under which thess pollci •• a,. 
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generaUy reported relying on either anecdotal evidence 

from insurers or, to the extent 

complaints to inform them 0' the status of the small 

employe, slop-loss market. One slat. "Ifleial noted, "We 

don't have '* way to monitor this. We he.r from [heallhl 

insur",s that they're losing customers to stop-los. 

Iha amount 01 sell-funding In the small group market. 

One formar stat. 'egulator Indicated that it \\f()uld not 

be difficult for stale departments of insurance 10 collect 

mora Information th,ough a data call, but Ihat such 

steps may draw negative reactions and questions from 

stakeholders. Only in Rhode island did officials indicate 

thallhey planned to begin collecting dala on lhls marks! 

mora closely In the near future. 

Lacking data, in/a,mants in 

aoec(iotal avldence Ihal traditional h.a!!h Insure,s limit 

many major health Insura", hava baan unwilling to sell 

stop-loss poliCies or related .all-lunding arrangamants 

to employer groups below 

primary reason given for this reticence was competlUon. 

As one Col",ado traditional health 

Their primary concern is maintaining current o,otit 

margins." An exchange officiru also noted 

Insurers conlrollMs fully In3urne! small group 

mark.I, Is generally profltab!e, 

undercutting them salva" if they began pushing prpducts 

that encourage small employera to self·funo. 

and smle officials-also reported 

beli."" Ihat Ihe sale of s10p·10$5 coverage or related 

.elt·fundlng arrangemenls to smallemplo)'l>rs i. not 

finanCially worthwhile. Stop-loss Insur.rs 

more policies If 

!n.ir n,lnl",,,," specific attachment pOints 

to a levollhal would aUrset smaller-siled "mployers, 

Ihe numbor of claims would rise, and Ihe administrative 

costs 10 handle such a large volume of claims would 

signift,oarltly. Ultimately, one ,epresenlative 

10 eighl.!op-Ioss Insur"rs, but only one wUl handle e 

group undar 50. However, other produce'" reported that 

selling sell-funded arrangements 10 smalle, groups can 

the right business model. 

producers 1. currently selling stop-loss coverage 0' 

related sell-funding .rrangements to groups of 50 or 

fewer employee .. Two former producers said they would h."" been he.llan! to jeopardize Ihe financial security 

complexity of lhe p,oducl acls as a barr'er discouraging 

producers from pushing self-funding to small ampioyers. 

According 10 " numbar of stakeholders, producers 

componanls-lm::Judlng provider ".!wori<s, 

administrators, and financial ",serves-a'. In place to 

ensur" lhat " small emplo)'l>r Is props,ly and adequately 

Even whan a self-funded arrangemant Is 

stili 'Ilqulra" a high level of aJ<psrtlse 10 understand the 

financial and legal risks for thai, amployer cUents. 

Pamaps unsurprislngly Ihen,lnrormants In most study 

sillIes speculated !hal the current sale of stop-loss 

have not received any complaints or other Information to 

suggsst Ihat insurar1l are violating the law by marketing 

Both 

'Ai' mi'nln1Wr attachment points for stoploss covsrags (such as Minnesota and Rhode Island) 

and !hose thai do not (such .. s Alabama, Michigan, 

New Maxico, and Virginia) suggested that they believe 

has had a long history 

01 insure", marketing stop-loss coverege and s,,~· 

funding arrangement. to madium-Io-Iarga amploy",s, 
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regulators. exchange officiais, producers. and small 

business representatives suggested 

sail! 01 these arrangement to "mploya,. with lower 

than 35 emplay""" Explaining Ihls, one informant from 

Colorado suggastad Ihat "th. currenl sma!1 group ... l!-

funding marka! employs very aggr" •• I.e underwriting, 

and therelora actually writes only" small porllon 0' C$.". submitted 10 It." 

togeth.r under ona polley. Socond, Ih .. s" •• II-Iunding 

a"angamen!. elm to limit small .mployer.' ,,"posur. 10 

ralh.r than holding 

reimllursament lor cl.ims th"t go above the smal! 

employars' speclfio all.chment point until the end of 

the plan year, such .rrangemmts previde immediate 

Implemsntation of the ACA's markel relorms in 2014 may 

sufficiently changa the "'centiv •• lor stakaholders and 

cau •• them to reconsider the feasibility 01 ""If-funding 

by groups of 50 er fewer omplol"*l5. Some intormants expoSlJre monlhly. This meamlthat if th"r. Is a bad 

on with the AC:A ,:ortling 

that a small sat 'Of insurers-includIng: a small numoor 

altraditional h"alth insu",rs as well "'s .oma slop·lo •• 

insurers-have ,,,,,.ntty begun ."llre!!siv·.ly 

small groups '0' bundled amlngiem:anl:., 

evidence of this, 

they had sean an increase tn 

seW·fundlng arrangoments targeting groups with 50 or 

fewer emplojl<las and, In some c.ses, groups as sma!! a. 

five employees," Multiple Informants als" reported thaI a 

nallonal health In.ure, has inves!eel heavily In "eveloplng 

sell-funding .,rangements that 

small employ",s and at least one mOra may be following 

suit in some states. 

According to """ producer, such bundlad pockall'" 

attempt '0 addras. two major barriem to .,,If-fundlng 

than Ihe annual aggregate, enabling the employer to 

spread claim. cost. out mo'" predictably over lhe course 

ollha ya!!f. The employer and Insurer would lhen come 

to a ."Itieman! al the end of the ya"r to aocounl lor any 

though, informanls notad that tha issuers 

olfaling th •• " self-funding arrangemenlS may be mora 

in the fully insured .mallllfOup m.rkat, and ore thus not 

cannibalizing their own products. Whether addltiona! 

h""llh Insur.r .. will move Into the small group Slop-loss 

marke, is le .. s 01_ at this slage. A representative from 

their enllre business modeljuet to get Into the .to!>"l"ss 

businellS flom fully insur"" 10 • self.funoed 

because OUl cOle business is fully Insured HMO 

and f'PO products. II'S what we prefer to do. But, II there 
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thai 
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vnder the ACA's insurance reforms, 

for the first timB na!ir"",,'de. 

guaranteed access to subsidized 

exchanges. 

businesses, 

former producers-expressed doubt thai producers are 

always adequately explaining 

to small amplo!!"", One reQuletor rsflected on prior 

:experience with increases in 

sell-funding among small employers coold destabilize 

the small group ma,ket and undermine the SHOP 

Slop-loss as a primary conc"tfI. Informants 

reported unllkelv before 

implementation 01 the ACA" 

Ac:cording to many informants, 

ioss wa. dua in par! to " lack of capacity. Mo.t study 

Slates a,e developlng stale-based exchanges and are 

focused 

exchanges. State officIals generalfy report~d having 

limited tlm~ to. focus on issues related to adverse 

selection against the exchange. As onG smalJ business 

representative active in exchange discussions !n 

response dld not surprise ene major insurer in Maryland 

who noled lhat "Stares have a lot on their hands, and 

they don', have tha bandwldlh to focus onlsauss that "r. 

and are instead 

focusing Of! how they oon make the SHOP appealing to 

Rhode Island, officials 

ara focusad <)n how to slruClur. Ihe SHOI' to ensure 

of incr"asall saU-funding among sman employars as lSI 

"h)!""lh"!lc~il," and anoth.r Informan! "oted thai "mos! 

go""tflmants aran't gOing to deal with !his preemptively." 

community rating rules, coverage 01 assantlal heal!h 
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complicate the discussion over whether it is necessary or 

appropriate to regulate th. 

small groups. 

With these changes, informants oft"" reported 

e'pecttc see increases in sell-funding by employers 

where groups are mostly experience~ratad and soma of 

the healthier and younger 9rOUpe could face incr"".e. 

pramiums under Ihe ACA's rating ,ar,omls--m"v 

community rating. ",,,,kA;ml<l,,,. 

one producer 00"' that groups over 50 are used 

undarwriUan, confronting lasers, and coverags denials, 

s" "they might as well take on 

laxes and fees In fully insured covsrage." A Mlonesola 

employers are 

However, 

hindered by a laok of data, with no slate able to raporl 

the actual number of .mall amployars covered under 

slop-Io.s policies or Iha lerms unde' which tho,"" pollclss 

are beil1!l markated. 

Mo.t informants expressed ooncern that sell-lundlng 

exposes sma!! businesses to too much financial 

risk. While .ome speculate that haalthle, smal! groupe 

may Increasingly be dr;""" to self-funding beeau,"" of 

Many informants agreed, 

Ihe ACA'$ employer 

same lime, " growth in self-funding among thase larger 

smati employers would likely Increase thE! ,isl< of adver.e 

9,eate, numbel'$ when they b.come subject 10 tho small 

group ma,k,,! ,e/orm rul •• 1n 2Ole. 
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To gather qualitative research using a convenjence sample, interviews were conducted with 2:2 state officials. 

includIng regulators, exchange officials. and others; eleven representatives of health a.nd stop .. loss insurers; ten 

current and former producers; .and five small business representatives, 

100 employ""s, 

HL, "Report to Congr.ss: Annual Report on Self-Insured Group Health Plans" (Washington: Department of Labor, 

April 2012), available at hltp:llwww.dol.gov/ebsa!pdf/ACAAeporIToCongress041612.pdf. 

Experts note Ihal slate efforts 10 regula!e slop-I"s. insurance may conlinue to face ERISA "m-emption 

challenges, 

und,,' the Affordable Care Act: Federal 

forthcoming, Washington & Lae, fl, "The battle over 

sell-Insu,ed h •• lth plans, or one good loophole deserves another," Vale Journal 01 Health Policy, law, and Ethics 

i,UCLA School of Law Resea'ch 

4. Accon::iing to. one recent analysis. 

5. 

around 

from 49.5 percent In 1999 to Sa5 percent In 2011. "Sell-Insured H •• !!h Plans: Sla!e V.riaijon and 

Aecen! Trends by Firm Slz,,: Notes 33, fl, 11 (Nov, 2012), aveilable at 

hllp:lfwww.abrl.orgfpdflna.espd!fEBRI .. Notes.l1.Nov-12.SIf·Insrdl.pdl. 

Employers, large or small, th,,! purcha.e a ';01'-10 •• policy requl", aCce •• to • provider ne!work, claim. 

proce •• lng, and other aamini.lr.llve •• rvlca. ",quired to properly adminlsl"r a ha.lth plan, Sonw employ"r. 

obtain Ihase •• rvlc". through s.p.rale conlract.; olh.rs buy Iham as • bundled package from .,hird·parly 

7, Buettgen. M and 8lumberg 

Pub, 1647 (Nov. 20i2), available at 

hUp:!!www.commonwealthfum:lofgIPubli .... !ionsll •• ua·Brlals/2012!NovISmall-Flrm-SeI!-lnsurance,a.px, 

Hall MA, "Regulating Stop-L" •• Cavoraga May S. Needed To Deter Self-Insuring Small Employer. Fr"m 

2 

9, The NAIC Model Act prohibits in.ur"", from Issuing a stop-loss polley with an attachment point Ie •• than $2(),OOO 

per person per year or Ihal provide. oi"",1 oovorsge of an Individual's health axpemls •. Aggmgats stop·lo •• for 

groups of mo,a than 50 may no! be lass than 110 percenl ol •• pecl:lld claims, for groupe 0150 or I" .. , 599m901" 

Colorado appllos a minimum specific aUachman! point of $15,000 and" minimum aggregate attaohment point of 

120 peroanl 01 ",pecled olaims far tha small group markel. 

no! la •• than 115 peroent oloxpected claims. 

12, Minnesota has applied a minimum "pacille attachment poln1 of $20,000 and 

point 01 not less tilan the 9matar of $4,000 times tha number of group members, 

or $20,000. 
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and 2013 RI HE! 5459. 
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R. 

IN THE HOURI,] OF RRPRERgNTATIVI~R 

To HlllPHd tile' 

tin'!lH'nt 

Ren'llw' 

iwalih 

msur'HlltP 

iH'alth 

1 

2 
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5 

7 

8 

o 

t2 

15 

19 

SECTION SHOR!f 

GROUP 
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6 

8 

!4 

m 
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85 

Mr. Chairman, 

I want to thank you for holding this hearing and highlighting the 

value of self insurance as an affordable option for small businesses 

seeking to provide their employees with quality health care. 

As a former Chairman of the Self Insurance Institute of America 

(SIIA), a former senior executive of two large Blue Cross health 

plans and a former owner and current operator of a third party administrator, I can tell you that self insurance is an important 

model that is being adopted rapidly all over the country. Given my 

extensive experience owning and operating third party administrators (TPAs), I can tell you that not only do self-insured plans provide businesses with an opportunity to generate significant savings 

but they provide employers with more flexibility to customize 

health care benefits for their employees. 

The commercial health insurance market has been steadily moving from fully insured to self insured for over three decades. Today 

61% of all employers in the U.S. self insure and the small group 

health insurance market is looking to self insurance as a more attractive method of providing health benefits to employees. According to the Kaiser Family Foundation, 16% of small businesses currently self insure their medical benefits. Many industry consultants 

believe that the cost advantage of self insuring will drive the small 

group market to over 50% self-insured. 

As a former senior executive of health plans, I can attest that the 

trend toward self insurance is undesirable for the large national 

health insurance carriers. The reason for this is that these large 

health insurance companies make much more money from fully insured clients than self insured clients. In many cases, I have seen 

that these companies make 300% to over 500% more profit on fully 

insured books of business compared to self insured business. Fully 

insured small employers with less than 500 employees are generally the most profitable groups for the insurance carriers. Needless to say, they have a strong financial interest in deterring smaller employers from making the switch to self insurance. 

Traditionally, self insurance is about 4–10% cheaper than buying 

a fully insured health policy, and given the costs of Obamacare 

that self insured plans avoid, this savings advantage is projected 

to grow to over 15%. Yet despite these significant savings, many 

states are trying to limit access to smaller employers. Add to this 

that some health insurance carriers, through pervasive market 

practices, are artificially inflating costs for self insured plans. 

In an attempt to protect their profits, some plans use tactics to 

block their self insured clients from enjoying free and open choice 

of vendors for their health plan, even though when an employer 

self funds, they should have full control of how their dollars are 

spent. Since the insurance company is only providing administrative back office services like claims processing for self funded 

groups, not taking risk, this practice is very restrictive. 

For example, some carriers block independent specialty service 

companies from offering medical cost saving solutions that would 

make self insurance even more financially attractive. Specialty 

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86 

companies focus on driving cost savings and quality improvements 

within a particular type of medical service such as pharmacy, vision, dental, mental health, radiology, oncology, fertility, transplant 

management and physical therapy. 

Further, many states ban smaller group self insurance or create 

limitations by artificially forcing larger deductibles on reinsurance 

for these smaller employers. These regulations amount to a restraint of trade designed to perpetuate the state tax revenue derived from fully insured plans. While many states claim they limit 

small employer self insurance because they want to protect those 

constituents, statistics show that small employers can benefit from 

this alternative insurance and strengthen their financial outlook. 

Several large carriers will refuse to release the claim experience 

for their insured smaller employers so that these customers cannot 

get competitive self insurance proposals. This practice is common 

and reflects further restraint of trade by these dominant insurers 

while protecting their bottom lines. 

These regulations and business practices have impaired the self 

insured market, making it much less cost effective than it would 

otherwise be under a truly free and open competitive market. I felt 

it important that the Small Business Committee is made aware of 

these detrimental market practices and I encourage further investigation. I appreciate your consideration of my testimony. 

Sincerely, 

Lawrence Thompson 

Regional President 

POMCO Group 

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87 

House Committee on Small Business 

Subcommittee on Health and Technology Hearing 

November 14, 2013 

Self-Insurance and Health Benefits: 

An Affordable Option for Small Business? 

Statement for the Record 

Rep. Bill Cassidy (LA-6) 

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88 

Chairman Collins, Ranking Member Hahn and members of the 

committee. Thank you for the opportunity to submit my statement 

for the record. Over 100 million Americans are currently covered 

under self-insured health plans. The trend towards self-insurance 

has been increasing for years, with 61 percent of the commercial 

health insurance market currently covered under self-insurance. 

Therefore, it is imperative to understand that self-insurance market and protect it as an option for businesses throughout the country. 

Self-insurance provides employers with the flexibility to customize their employee health benefits to best meet the needs of 

their workforce. Self-insurance also helps control costs because employers can more directly manage programs such as wellness programs, which save money and make people healthier. 

Unlike traditional health insurance, self-insured employers take 

on the risk for their employees. It is impossible for the employer 

to precisely predict the amount of health claims they must provide 

from year to year. In order to limit the employer’s exposure, they 

often buy stop-loss insurance. This financial tool is important to 

provide certainty to employers. 

Moreover, the Obama administration has recently expressed interest in regulating stop-loss insurance. As recently as August 22, 

2013 in a letter to Congress, HHS Secretary Kathleen Sebelius confirmed that the department is interested in how regulating stoploss insurance could affect the risk pools in the fully insured market. It is concerning that the administration is considering limiting 

access to the stop-loss financial tool for businesses. Stop-loss insurance has always been a state-regulated insurance tool. Limiting it 

would have a detrimental effect on the self-insurance market. 

In order to protect the self-insurance market, I introduced H.R. 

3462, the Self-Insurance Protection Act (SIPA). The legislation 

would clarify that federal regulators cannot re-interpret stop-loss 

insurance as traditional health insurance for the purpose of regulating it. This clarification would protect this important financial 

option and provide certainty for thousands of businesses across the 

country. The legislation is supported by the Self-insurance Institute 

of America (SIIA) and the U.S. Chamber of Commerce. 

Again, thank you for the opportunity to include this statement 

for the record. Also included are H.R. 3462, and a letter of support 

by the U.S. Chamber of Commerce. 

Sincerely, 

Rep. Bill Cassidy (LA-6) 

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time. 
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WOODLAND TRUCK INC. 

is