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How States Can Offer An Obamacare Alternative


Enrollment on the Obamacare health insurance exchanges reached 7.1 million Monday, the last day (more or less) of open enrollment, exceeding the administration’s goal and prompting the president to declare that “the debate over repealing this law is over.”

That might not be quite true (on Wednesday, Louisiana Gov. Bobby Jindal unveiled a plan to repeal most of the Affordable Care Act and replace it with conservative-minded reforms), but it seems clear that the enrollment numbers have prompted a separate debate about what they mean and whether or not they prove the law has been successful.

As many observers noted this week, we don’t know how many of the 7.1million were previously uninsured, (an unpublished RAND Corporation study says it’s only about a third, and a McKinsey survey in February put the share at 27 percent). As Forbes’ Avik Roy pointed out, “The Congressional Budget Office, in its original estimates, predicted that the vast majority of the people eligible for subsidies on the exchanges would be previously uninsured individuals.”

So far, however, it looks like most of those signing up were previously insured. Why didn’t more uninsured people sign up? In Texas, where the Department of Health and Human Services last month estimated that 2.2 million uninsured Texans qualify for a subsidy to purchase coverage on the federal exchange, fewer than 300,000 had signed up as of March 1. That’s not the final figure, but even with a sizeable surge in the last month of enrollment the total will be far less than what you would expect in a state with the highest uninsured rate in the nation.

A close look at HHS data shows that in Texas and the nation at large, about twice as many people filled out an application on the exchanges as enrolled in a plan. Given that exchange plans are far more expensive than many pre-ACA plans, especially for the young and those who earn more than about $28,000 a year, that probably means a lot of people went online, saw how much the plans cost, and decided they didn’t want what Obamacare was selling.

That is, Obamacare’s top-down approach to health reform has apparently produced health insurance plans that vast swaths of the uninsured don’t want to buy, the individual mandate and federal subsidies notwithstanding.

This presents an opportunity for state legislatures to step in and offer an alternative: self-insurance.

Without Congressional action, states can only do so much to encourage self-insurance for individuals and small businesses. But they are not entirely helpless. If they want to, they can actively help Americans who are willing to help themselves. Last month, the Texas Public Policy Foundation published a paper of mine that lays out two self-insurance strategies state lawmakers could develop to help individuals and small businesses pay for health care on their own terms without capitulating to the demands of Washington, D.C.

Individual Self-Insurance

The ACA authorizes HHS to regulate health insurance carriers, defined as “an insurance company, insurance service, or insurance organization (including a health maintenance organization, as defined in paragraph (3)) which is licensed to engage in the business of insurance in a State and which is subject to State law which regulates insurance.”

If a state licenses an entity as a “health insurance issuer,” the federal government is required to recognize the entity as such—even if it happens to be an individual. State lawmakers could therefore authorize a savings-based approach to health insurance for individuals and their families, bypassing a host of ACA mandates and opening the way toward an innovative new future for health coverage.

If a state licenses an entity as a “health insurance issuer,” the federal government is required to recognize the entity as such—even if it happens to be an individual.

In fact, a bill passed by the Texas House last year created a state-based mechanism for individuals to self-insure as “dedicated personal insurers,” satisfying the ACA’s individual mandate without forcing people to choose between paying for exchange coverage and paying a penalty. The bill didn’t find support in the State Senate, but part of the reason was that it limited authorization to those who could set aside a significant amount of capital every year—$10,000 or $20,000, depending on age.

An amended draft version of the bill makes key changes to these capital requirements and opens self-insurance up to more people. Instead of stipulating a dollar amount, it requires only that the self-insurer set aside eight percent of their adjusted gross income annually to pay for medical expenses, capped at $60,000. This eight percent threshold mirrors Obamacare’s affordability provisions, which generally exempt those unable to find coverage equal to eight percent of their income or subsidizes exchange premiums that exceed that amount.

In self-funded employee health benefit plans, employers bypass traditional insurance arrangements and simply pay for the cost of employees’ medical claims. Such plans are regulated by the 1974 Employee Retirement Income Security Act (ERISA) rather than HHS or state insurance codes. Likewise, individual self-insurance would be exempt from most ACA rules and state regulations because it wouldn’t really be insurance as such but rather a savings program to pay for health care—authorized and regulated by the state, not the federal government.

Stop-Loss for Small Business

The other thing state lawmakers can do to create an Obamacare alternative is to encourage self-funded health benefit plans for small businesses. As mentioned above, such plans fall under ERISA and are exempt from the regulations and taxes of the ACA, and also from state insurance regulations (because, again, self-funding isn’t technically insurance). Hence, companies that self-fund are free to tailor benefit plans as they see fit instead of being forced to offer plans loaded with government-mandated benefits.

For the most part, only large firms can do this because they’re able to spread risk among many employees and absorb unforeseen medical costs. Last year, 83 percent of all covered employees at large firms were enrolled in self-funded or partially self-funded plans, compared to only 16 percent of employees at small firms. Usually, large firms also purchase stop-loss coverage to limit their financial risk. Stop-loss (sometimes called reinsurance) covers large or unexpected medical claims after a certain dollar amount, or “attachment point,” is reached by a single employee or by all employees collectively (what’s called aggregate stop-loss). Combining a self-funded health plan with stop-loss coverage is increasingly attractive to large and small firms alike because it allows employers to avoid costly ACA mandates to cover things like maternity and mental health.

But Obamacare is making this benefit arrangement increasingly attractive to smaller companies, and the market is responding to growing demand.

But Obamacare is making this benefit arrangement increasingly attractive to smaller companies, and the market is responding to growing demand. Last year, United Health began offering stop-loss coverage to firms with as few as ten employees. Humana and Cigna Corp did something similar, offering stop-loss to groups of 26 and 25, respectively.

No surprise, then, that Obamacare champions are looking for ways to regulate stop-loss and close this loophole. At a Congressional subcommittee hearing last month, Maura Calsyn, the director of health policy for the left-leaning Center for American Progress argued that if more employers self-insure it will drive up premiums on the exchanges. She called for “oversight and regulation of stop-loss insurance.”

In the context of the Obamacare, the purpose of imposing oversight and regulation is to prevent small employers from self-funding and instead funnel their workers into the exchanges. Currently, Utah, Colorado, Idaho, Rhode Island, and North Carolina are contemplating legislation to this effect. Most of those bills mandate attachment points ranging from $20,000 to $40,000—high enough to make it too risky for small businesses to self-fund. Last fall, California passed a law that did just this. It prohibited stop-loss carriers from issuing coverage with deductibles of less than $35,000 for policies beginning this year, increasing to $40,000 in 2016.

Conservative states should do the opposite: get rid of attachment point requirements (if they have any) and exempt stop-loss coverage from all state taxes so the policies are more affordable for small businesses. Even better, states could define stop-loss in statute and exempt those policies from consumer protection and rate-making regulations.

Obamacare may or may not be here to stay. But the health care debate is far from over. The ACA relies heavily on states to implement its misguided policies, from Medicaid expansion to the insurance exchanges, in recognition that states have traditionally regulated health insurance. If states want to, they can reassert that authority and empower their residents and businesses to pay for health care and health insurance on their own terms. Who knows, after four years they might even cover more people than Obamacare.

Mr. Davidson is a writer based in Austin, Texas, and a health care policy analyst at the Texas Public Policy Foundation.