California Cracking Down on Latest Health Insurance Scam

| Fri Mar. 23, 2012 10:30 AM EDT

As you may recall, the health insurance market doesn't work well if companies are allowed to cherry pick their customers. If that's allowed, companies will all chase after the youngest, healthiest customers, leaving the older ones high and dry — and there are plenty of ways of doing this. It's not a matter of only signing up companies that can prove their workforce has an average age of 28; it's a matter of targeting certain kinds of companies, or shaping your plans so they appeal to a younger cohort. Apparently the latest version of this scam involves selling group health policies to small companies that are supposedly self-insured:

Some insurers are chasing after much smaller customers with new plans designed to limit employer payouts for big claims using what's called stop-loss policies. This guarantees that businesses won't be responsible for anything over a certain amount per employee, perhaps as low as $10,000 or $20,000, with the rest paid by an insurer. Regulators and health-policy experts say this arrangement undercuts the notion of self-insurance since employers aren't bearing much of the risk, and it allows companies to circumvent some state insurance rules.

"This is not real self-insurance. This is clearly a sham," said Mark Hall, a professor of law and public health at Wake Forest University who has studied the small-business insurance market. "Regulators have good reason to be concerned about the potential harm to the market."

Self-insurance is attractive for many reasons, particularly the prospect of lower costs. It's exempt from state insurance regulations such as mandated benefits, granting employers the flexibility to design their own benefit package and the opportunity to reap some of the savings from employee wellness programs. A federal law, the Employee Retirement Income Security Act, or ERISA, governs self-funded plans. Some aspects of the Affordable Care Act do apply to self-insurance, such as the elimination of caps on lifetime benefits and some preventive care at no cost.

Yeah, it's a scam. Self-insurance is for companies big enough that they can count on losses evening out. Small companies can't do it because a single million-dollar cancer could wipe them out.

So what's the answer? Easy! Sell small companies on the idea of "self insuring," but only up to $10,000 per employee. After that, the insurance company pays the bill. The advantage to employers is that they get to evade the usual insurance regulations. The advantage to insurers is that small companies tend to be young companies.

Needless to say, an insurance policy with a $10,000 deductible is still an insurance policy. Likewise, these shiny new self-insurance plans are still insurance policies. They look, walk, and quack like ducks. They're ducks. An HHS spokesman says they will "provide more clarity" about their legality soon. Hopefully that clarity will be an outright ban.