Review & Outlook: The Attack on Self-Insurance

September 12, 2013, 6:46 p.m. ET - The Wall Street Journal

The Attack on Self-Insurance

Liberals want to rewrite Erisa to save ObamaCare.

The Affordable Care Act is supposed to be a paradise for the middle class, but now that Americans are starting to eat from the tree of knowledge, the liberal deities are trying to force them to stay inside the garden. Witness their crackdown on the booming ObamaCare alternative known as self-insurance.

Under this model, businesses and many unions bypass commercial health plans and instead pay directly for the medical claims of their workers. Self-insured plans enjoy lower costs and more flexibility because they are insulated from state regulations and mandates under a 1974 federal law known by the acronym Erisa.

Today a record 61% of covered workers are in a self-insured plan, according to the Kaiser Family Foundation's 2013 survey, up from 49% in 2000. Self-insurance used to be concentrated among national companies that could spread risk over large pools of employees.

But self-insurance is now filtering down to businesses with 199 workers or fewer, as a hedge against ObamaCare's federal mandates and the danger that costs on its small-business exchanges will soar. Some insurers are now selling popular products that allow groups as small as 25 to self-insure. In a 2012 study, the Urban Institute found ObamaCare's incentives will cause as many as 60% of small firms to convert without regulatory changes.

So the White House, liberal pressure groups and state and federal regulators are trying to close what they call the self-insurance "loophole" before more escape. Their political and actuarial fear is that if enough businesses don't join, the exchanges could fail because too few younger and healthier people will subsidize everybody else.

In a June alarm titled "The Threat of Self-Insured Plans Among Small Businesses," the liberal Center for American Progress warns that "the result of this shift could cause an insurance premium death spiral." Note how businesses that pay for their workers' health care are suddenly a "threat." Wasn't coverage the point of ObamaCare?

Big business loves Erisa's freedoms, so the left's political target is so-called stop-loss insurance that is essential to the little guys. Unlike corporate America, small employers are more exposed to the risk of a single high-cost case of serious illness, so they buy this form of catastrophic coverage as a self-insurance backup.

Liberals are pushing state legislatures to outlaw stop-loss policies for small and mid-sized business. Another poison pill is fixing the dollar levels where stop-loss policies are allowed to start paying—aka "attachment levels" akin to deductibles—so high that they are too risky for small businesses to buy. The standard can be as low as expenses exceeding $10,000 per enrollee, but liberals want to triple or quadruple that, or more.

Democrats in California have been leading this effort as usual, though more than a dozen states including Colorado and Rhode Island have either passed or are moving such destructive bills. Insurance commissioners also love this because it gives them more regulatory power.

Speaking of which, another danger is that the Obama Administration may try to unilaterally rewrite Erisa. In May 2012 the Labor Department joined Treasury and Health and Human Services on a regulatory "information request" about stop-loss that is a prelude to a new rule-making.

That document muses that "It has been suggested that some employers with healthier employees may self-insure and purchase stop loss insurance policies with relatively low attachment points to avoid being subject to [ObamaCare's] requirements while exposing themselves to little risk." That sounds like a solution in search of a problem.

One threat is for the Labor Department to use regulation to define stop-loss as a "health insurance issuer," rather than financial reinsurance that all industries use to manage risk. The trouble is that stop-loss doesn't pay providers or medical claims or cover individuals—and in any case three of five self-funded plans use some form of stop-loss, not merely the new small business wave.

The double trouble is that most companies that self-insure use an add-on company such as a brand-name insurer for processing payments, building networks, etc. Once Labor starts controlling "issuers" in the name of rescuing ObamaCare's exchanges, all Erisa benefits become subject to political tampering.

That's a specialty of new Labor Secretary Thomas Perez, who has more than a few businesses worried. Mr. Perez made his name stretching the law at the Justice Department, but he cut his political teeth at HHS in the Clinton years and as special counsel to the late Ted Kennedy.

One irony in all this is that the collateral damage will include union health plans covered by collective bargaining in industries like construction and services. Thousands of small Taft-Hartley union trusts rely on stop-loss and may lose that option, along with millions of other people who don't work for the Fortune 500. President Obama famously promised that if you like your health plan you can keep it, but this Erisa gambit will also scramble the plans of the businesses that already self-insure as a safe harbor.

In 2009 we ran a series of editorials called "Repealing Erisa" that exposed new Labor Department oversight of self-insurance in the House ObamaCare bill. The controversy and business criticism forced Democrats to strip that provision out, but this latest assault shows that the threat is back. Liberals hate Erisa's pluralism in favor of total government control, and small business is merely the appetizer.

A version of this article appeared September 13, 2013, on page A14 in the U.S. edition of The Wall Street Journal, with the headline: The Attack on Self-Insurance.