Small employers across the country consider self-funded health insurance as a way to provide affordable health benefits for their employees. Statistically, a large or mid-sized group is more likely to self-fund their medical benefits than a small employer because of the financial risks involved.

This makes sense given that one large claim could represent a much larger share of overall spending for a small employer than a large employer. A 100 life group can handle a $50,000 claim much better than a 30 life group, for example.

Still, small employers have been able to self-fund their health insurance by purchasing specific stop-loss insurance with low deductibles, such as $20,000 or $30,000.

In California, SB-161, the “Stop Loss Bill” makes this a different story.

What Does SB-161 Say About Self-Funding in California?

CA SB 161 as signed into law by Governor Jerry Brown in 2013 and went into effect beginning in 2014. It limits the ability of small employers, defined as employers with under 100 employees, to self-insure their health benefits.

Specific provisions of SB 161 include:

CA SB 161 on Specific Attachment Points

CA SB-161 requires stop-loss insurers to issue policies with specific deductibles of at least $35,000 for groups with between 1 and 100 employees. As of 2016, the attachment point was increased to $40,000.

CA SB 161 on Aggregate Attachment Points

The bill requires that aggregate attachment points for stop-loss insurance cannot be less than the greater of one of:

• $35,000 (increasing to $40,000 in 2016)*;
• 120% of expected claims; or
• $5,000 times the total number of group numbers

* Note that aggregate attachment points will always be much higher than specific deductibles, increasing with the group size, so this is a less relevant point, but we want to mention it.

CA SB-161 Eliminates “Lasering”

Stop-loss carriers practice various forms of risk management. One such form is lasering, where the stop-loss policy excludes a specific employee or dependents from coverage even if they are eligible for coverage under the employer’s self-funded group health plan. This is done in events where that employee or dependent has high claims in a prior year or an illness which is expected to result in high claims.

Reporting Requirements on Stop-Loss Insurers on Small-Employer Stop-Loss Policies

Beginning in April of 2014, SB 161 required stop-loss insurers to report annually to the California Department of Insurance the total number of small-employer stop-loss policies they issued in the prior calendar year.

Required Renewal for All Stop-Loss Policies for Small-Employers

Finally, SB 161 requires stop-loss insurers to offer a renewal of all stop-loss policies for small-employers except for reasonable circumstances, such as nonpayment of premium (after a 30-day grace period), fraud, misrepresentation by the employer.

There are also exceptions if the insurer becomes financially impaired as deemed by the state insurance commissioner or the carrier altogether exits the California stop-loss insurance market.

How Does SB-161 Affect Self-Funding in California?

In sum, California SB-161 limits the choices available to small-employers in California with self-funded group health plans when it comes to stop-loss insurance policies.

According to a 2019 survey by Milliman of stop-loss carriers, 15% of specific stop-loss policies have deductibles under $75,000. Considering that the majority of groups self-funding health benefits are over 100 employees, this shows that a lower specific deductible is a key consideration for a small-employer considering self-funding.

By setting a relatively high bar for specific deductibles ($40,000 today), small-employers must retain a greater amount of risk than a small-employer in another state with a lower specific attachment point, say of $25,000 or $30,000. This can be a make or break decision for some small-employers, and it may be a non-factor for other small-employers.

The impact of this law on the California employer’s decision to self-fund comes down to the group’s appetite for risk and should always be a point of consideration when in consultation with professional advisors when deciding to self-fund a health plan.

Posted by John Hansbrough in Healthcare Spending, Legislation, Research, Self-Funding