Hospitals

Why self-insurance is the best way to reduce the hit of the Obamacare tax

In 2014, the health insurance tax will increase the already hefty cost of healthcare coverage for employers relying on insured products to cover their workforce. To offset this added burden, as well as other Affordable Care Act (ACA) challenges, a number of companies have switched to self-insuring their health benefits. Self-insurance offers an employer greater […]

In 2014, the health insurance tax will increase the already hefty cost of healthcare coverage for employers relying on insured products to cover their workforce. To offset this added burden, as well as other Affordable Care Act (ACA) challenges, a number of companies have switched to self-insuring their health benefits.
Self-insurance offers an employer greater flexibility than commercial insurance, while providing the kind of practical and economic advantages that curb costs, such as:

  • Helping employers tailor plans to the specific health needs of a workforce population, especially if guided by the right healthcare management firm
  • Maximizing cash flow because claims are funded as they are paid, rather than functioning based on prepayment
  • Generating as much as three percent immediate savings because state taxes are eliminated on most self-insured plans
  • Eliminating carrier profit margins and risk charges

In addition, self-insured health plans allow employers to pay for individual employee health claims out of cash flow rather than as a monthly fixed premium to a health insurance carrier. While employers assume the direct risk for payment of claims, costs are based upon actual plan member healthcare use. This makes self-insuring cost-efficient and more effective than the one-size-fits-all model of the fully insured plan.
To avoid large expenses resulting from catastrophic claims, self-insured companies often purchase stop-loss insurance to protect against such unexpected claims. Stop-loss serves as a financial buffer when, for example, an employee is found to have cancer or needs an organ transplant.
Significantly, the new tax leaves traditional self-insured plans with stop-loss exempt1 from the fee on health insurance carriers. As the majority of large businesses, labor unions, and governments self-insure, the new health insurance tax will result in smaller percentage increases in average health insurance premiums for large firms and cause greater increases for small firms that rely on insured coverage, as well as non-group health insurance coverage.

Understanding the Health Insurance Tax
Key facts about the new insurance tax include:

  • The amount of the tax will be $8 billion in 2014, increasing to $14.3 billion in 2018, and thereafter increasing based on premium trend
  • The Joint Committee on Taxation estimates that the health insurance tax will exceed $100 billion over the next 10 years – and the Congressional Budget Office (CBO) representatives state that this tax will be “largely passed through to consumers in the form of higher premiums
  • Experts predict the tax will increase premiums in the insured market on average by 1.9 percent to 2.3 percent in 2014, and 2.8 percent to 3.7 percent by 2023

The impact of the tax affects market segments differently. For individual market consumers, premiums increase over a ten-year period for single coverage by an average $2,150, and for family coverage an average $5,080; for small employers premiums increase over a ten-year period for single coverage by an average $2,760, and for family coverage an average $6,830; and for large employers premiums increase over a ten-year period for single coverage by an average $2,610, and for family coverage an average $7,130. 

Time for Change
Clearly, the looming health insurance tax burden adds additional pressure on employers, who are searching for ways to overcome reform challenges aimed at insurance-based plans, including:

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  • Essential health benefits requirements
  • Comprehensive coverage for health benefits package
  • Jurisdiction of state ombudsmen
  • Ensuring that consumers get value for their dollars

What’s more, the ACA does not subject self-insured health plans to the jurisdiction of the states, while insurance-based plans must comply with the varying coverage mandates, insurance statutes and regulations of the 50 states. In addition, self-insured plans continue to be exempted from state mandates and regulation by virtue of ERISA’s preemption of state action in connection with self-insured health and welfare benefit plans. For the most part, self-insured plans are not subject to litigation in state courts or the appeal and complaint procedures of the insurance departments of each of the states.
By understanding the benefits of self-insured health plans, including a full understanding of the scope of financial obligations, opportunities to safe-guard against catastrophic health events, and other techniques to lower healthcare costs, employers can begin to control healthcare costs and ease the transition into the new era of healthcare reform.