Life Line for New York SIGs Falling Short While National Attention on Funds Sharpens

It appears my recent story “A New Life Line for Group Workers’ Comp Funds in New York” was overly optimistic and the obituary for SIGs in that state may indeed be published in the not too distant future.

According to knowledgeable sources, preliminary discussions about finding a reasonable compromise to allow well run New York SIGs to continue to operate have not panned out. At issue has been the posting of security to satisfy regulator concerns about solvency going forward.

The state’s workers’ compensation board pushed back against formulas proposed by industry that would allow funds sufficient access to cash to pay claims and other operating expenses. As a result, a new law has been passed requiring funds to post security equal to 160% of expected claims. With such a high bar, it is likely that the baby will be thrown out with the bath water.

There is some uncertainty, however, as the regulations to implement the new law has yet to be written and industry continues to press its case to the Governor and the Legislature that this law will have significant negative ramifications for the state’s workers’ compensation system. So stay tuned as there may additional twists to this story in months ahead.

But while New York has been the epicenter of actual legislative/regulatory activity affecting SIGs, it’s worth noting that the New York experience has spurred discussions in national forums.

Just last month at the National Council of Self-Insurers (NCSI) Annual Meeting, representatives from the California Self-Insurers Security Fund presented a session on SIGs. Although some good objective data was provided, there was an obvious bias evidenced by the fact that they were quick to point out the isolated problems within the SIG industry without acknowledging that the overwhelming number of SIGs are well run and provide smaller employers an important risk financing option.

It should not be surprising that the presentation concluded with comments suggesting that national standards for SIG regulation should be considered.

This discussion promises to pick up again next month Southeastern Association of Workers’ Compensation Administrators (SAWCA) Annual Meeting as one of the featured sessions will discuss “warning signs for a SIG default.” This meeting typically attracts a large number of regulators so the meeting room is likely to be filled with those who may be inclined to make it more difficult for SIGs to operate.

While a serious regulatory push with national reach may not be right around the corner, those who have an interest in maintaining sensible SIG regulation should nonetheless pay attention to the discussions that are going on because developments can accelerate with little warning.

Not only do you have regulators encouraging each other to conform to group think about how to deal with SIGs, but the traditional insurance industry never misses an opportunity to stir the pot by trying to make funds look bad. The confluence of these dynamics should keep SIG industry stakeholders on their toes.

So we’ll watch to see how things continue to play out in New York while keeping an eye on other states who may not be able to resist on messing with a good thing.

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Obsessed With Adverse Selection

In case you haven’t heard, self-insurance is the gateway to adverse selection in the health insurance marketplace. Federal and state regulators have been sending up warning flares on this subject, but not surprisingly, their aim misses the mark.

This discussion has heated up as policy-makers look ahead to 2014 when state insurance exchanges are slated to come on-line and they try to predict market conditions and that time. For PPACA supporters, there’s a lot riding on making sure the exchanges work as promised so they are taking aim at any real or perceived obstacles. Adverse selection drivers are at the top of the list.

We saw this first in the HHS Report on the Large Group Market, which was published in March. In the report HHS commented that if low attachment point policies in the reinsurance (read stop-loss) market become more widely available by 2014, a significant number of fully-insured employers with “low risk” employees will switch to self-insurance, therefore creating adverse selection in the marketplace.

This section of the report concludes that “these results highlight the importance of closely monitoring the availability and pricing of reinsurance (stop-loss insurance) and closely monitoring decisions made by small employers to self-insure.”

A working draft of a recent NAIC white paper on the subject of adverse selection also points the finger at self-insurance as contributing to adverse selection. The NAIC writes: “Employers with favorable risk demographics have an incentive to self-fund while those with less desirable risks would tend to opt for fully-insured plans either through the exchange or in the outside market.”

Neither HHS nor the NAIC acknowledges one very important fact as part of their analysis, which is that most companies with fewer than 100 employees simply do not know if their group is a good risk because claims data is generally not available to them. In this regard, their “premeditation” argument is compromised.

Now it’s true that employers that switch to self-insurance can often improve the aggregate risk profile of their groups over time, regardless of the baseline at the time of transition, through wellness programs and other innovative plan design strategies, but shouldn’t that be the objective of all group health plans?

Let’s also recognize the importance of the HHS comment about “closely monitoring” the stop-loss market as way to guard against adverse selection. As described in my previous blog posting, Treasury Department Gets Schooled on stop-Loss Insurance, federal regulators now have a keen interest in stop-loss insurance for a variety of reasons.

This new federal attention combined with the ongoing desire by state legislators to expand their authority over self-insured health plans creates a very uncertain environment for future legislative/regulatory activity that could affect the ability of small and even mid-sized companies to self-insure.

There’s one last development on this subject worth mentioning. Some key House Republican staffers have indicated a renewed interest in introducing association health plan (AHP) legislation, but are holding back because of anticipated criticism that self-insured AHPs would contribute to adverse selection. So the education process continues on multiple fronts.

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