One way that employers seek to control health plan costs is by self-insuring the plan. By self-insuring, an employer pays only the cost of claims plus an administrative fee to a third party administrator. An employer can insure against the risk of catastrophic claims by purchasing stop loss insurance. An added benefit is that self-insured plans are exempt from most State insurance laws, such as laws mandating that certain benefits be covered. This gives an employer with a self-insured plan more flexibility to design the health plan to control costs and meet the needs of its employees. Although traditionally only large employers have self-insured their health plans, news reports indicate that more small employers may be considering the self-funding alternative.

On May 1, 2012, the Departments of Labor, Treasury, and Health and Human Services issued a Request for Information Regarding Stop Loss Insurance, in which the Departments asked a series of questions about stop loss insurance for health insurance plans. Stop loss insurance allows an employer to self-insure for a fixed amount of claims, with stop loss insurance covering the remainder of the clams that exceed the fixed amount, called the "attachment point."

Under the principles of ERISA preemption, employers and health plans that purchase stop loss insurance generally are not subject to State insurance laws including mandated benefit laws, rating policies, and other State and Federal consumer protections applicable to health insurance, including some of the patient protections under the Patient Protection and Affordable Care Act ("Affordable Care Act"). Some experts have suggested that certain small employers (particularly those with healthy employee populations) may choose to self-insure and purchase stop loss insurance policies with relatively low attachment points to avoid being subject to these requirements while exposing themselves to little risk. For example, if the attachment point were set at $5,000 per employee or $100,000 for a group, a small employer would be assuming a low degree of risk and yet exempting itself from State insurance regulation. If a large number of employers were to follow this path, it could worsen the risk pool and increase premiums in the fully insured small group market, including in the Small Business Health Options Program (SHOP) Exchanges that will be available on January 1, 2014. In other words, adverse selection could threaten the financial stability and ongoing viability of the small group market and the SHOP Exchange.

According to the Request for Information, the Departments have little data on the incidence or terms of stop loss insurance among self-insured employer group health plans, and are soliciting comments (due by July 2, 2012) that will contribute to the Departments' understanding of the current and emerging market for stop loss products. After reviewing the comments, further regulations could be issued if the Departments determine that a trend toward self-insuring by small employers could threaten the small group market and/or the SHOP Exchange.

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