Legislation seeks to stabilize insurance market

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The Colorado General Assembly is considering a bill to regulate stop-loss insurance and attempt to stabilize the small-group market.

It’s good news for most small businesses with traditional insurance, but could leave a handful of small businesses paying more money.

House Bill 1290 also seeks to end a practice common in the stop-loss market — denying coverage to people with pre-existing conditions — that was banned in the traditional insurance market in 2010 when Congress passed the Affordable Care Act.

The bill is aimed at the self-insured market, which covers a minority share of small businesses. Companies that self-insure pay all health care costs for employees, up to a certain level. Once they meet a financial threshold, commercial insurance kicks in. Known as stop-loss insurance, the policy keeps businesses from overspending their health care budget for long hospital stays or expensive accidents. In Colorado, about 35 percent of businesses self-insure, but only 7 percent of businesses with fewer than 50 employees use self-insurance.

Currently, stop-loss insurance takes effect once an employer pays a minimum of $15,000 for an individual employee. House bill 1290 raises the limit to $30,000. Some consumer advocates believe the level should be even higher — once inflation is taken into the account, a reasonable level would be $60,000, says Serena Woods, director of strategic engagement at the Colorado Consumer Health Initiative.

At first blush, the bill seems to hit self-insured businesses unfairly. But the bill is necessary, Woods said, because the small group market needs to be both robust and diverse.

“If employers with healthy employees self-insure while those with sick employees stay in the regular fully insured market, it creates adverse selection, which will destabilize the small group market,” she said. “The market and sale of stop-loss insurance to smaller and smaller employers can accelerate this problem.”

Currently, stop-loss plans can deny coverage to sick people, whose medical costs are then covered by the employer. Once it gets too expensive, they jump to traditional coverage — taking their sick employees with them. That leads to an unstable small-group market, with employers jumping in and out depending on the health of their employees. According to Dede de Percin, executive director of CCHI, the practice drives up premiums. As more small businesses opt for stop-loss coverage, health care becomes more expensive for everybody else.

In fact, a 2012 Urban Institute study found that insurance rates could go up as much as 25 percent if stop-loss insurance isn’t regulated more fully, she said.

Insurance companies seem to agree that it’s time to regulate stop-loss insurance. Cigna, a major health insurance company operating in Colorado, testified in favor of the bill. It also has bipartisan support, de Percin said. The bill passed the House on third reading earlier this week.

But House Bill 1290 seeks to do more than just raise the individual attachment point, the dollar level at which stop-loss insurance kicks in. It also bans a widespread industry tactic known as “lasering.”

“Basically, it’s underwriting,” Woods said. “And that’s prohibited under the Affordable Care Act. You can’t exclude people based on pre-existing illness or previous insurance use.”

But that’s exactly what lasering does — it denies coverage to employees who spend too much money on health care. Businesses are then responsible for nearly all the costs associated with the employee, Woods said.

“This bill merely brings Colorado more in line with federal law,” she said. “In that way, it’s a necessary bill. It’s technical, but it’s necessary to comply.”

It’s also necessary to keep premiums down in the small-group market — and that’s done by having a diverse mix of both healthy and sick employees inside and outside of the insurance exchanges, Woods said.

“Only a handful of small businesses self-insure,” she says. “This is needed to stabilize the sector. We need a robust small-business market as the exchanges come on line.”

The Colorado Health Benefits Exchange is expected to start selling policies in October, with the policies becoming active in January, 2014. Small businesses and individuals can use the exchange to find insurance products that suit their needs — and in some cases, receive a government subsidy to cover the expense.

Colorado isn’t alone in trying to regulate stop-loss insurance. Twenty-four other states already regulate the market — 19 have minimum attachment points, three states ban the sale to small groups and two states regulate stop-loss as health insurance. So far this year, stop-loss legislation has also been introduced in Minnesota, Rhode Island, California and Utah.