Small firm self-insurance under the Affordable Care Act

The Affordable Care Act changes the small-group insurance market substan­tially beginning in 2014, but most changes do not apply to self-insured plans. This exemp­tion provides an opening for small employers with healthier workers to avoid broader sharing of health care risk, isolating higher-cost groups in the fully insured market. Private stop-loss or reinsurance plans can mediate the risk of self-insurance for small employ­ers, facilitating the decision to self-insure. We simulate small-employer coverage decisions under the law and find that low-risk stop-loss policies lead to higher premiums in the fully insured small-group market. Average single premiums would be up to 25 percent higher, if stop-loss insurance with no additional risk to employers than fully insuring is allowed--an option available in most states absent further government action. Regulation of stop-loss at the federal or state level can, however, prevent such adverse selection and increase stabil­ity in small-group insurance coverage.