[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]




 
  SELF-INSURANCE AND HEALTH BENEFITS: AN AFFORDABLE OPTION FOR SMALL 
                               BUSINESS?

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON HEALTH AND TECHNOLOGY

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                           NOVEMBER 14, 2013

                               __________

                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               

            Small Business Committee Document Number 113-042
              Available via the GPO Website: www.fdsys.gov



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                   HOUSE COMMITTEE ON SMALL BUSINESS

                     SAM GRAVES, Missouri, Chairman
                           STEVE CHABOT, Ohio
                            STEVE KING, Iowa
                         MIKE COFFMAN, Colorado
                       BLAINE LUETKEMER, Missouri
                     MICK MULVANEY, South Carolina
                         SCOTT TIPTON, Colorado
                   JAIME HERRERA BEUTLER, Washington
                        RICHARD HANNA, New York
                         TIM HUELSKAMP, Kansas
                       DAVID SCHWEIKERT, Arizona
                       KERRY BENTIVOLIO, Michigan
                        CHRIS COLLINS, New York
                        TOM RICE, South Carolina
               NYDIA VELAZQUEZ, New York, Ranking Member
                         KURT SCHRADER, Oregon
                        YVETTE CLARKE, New York
                          JUDY CHU, California
                        JANICE HAHN, California
                     DONALD PAYNE, JR., New Jersey
                          GRACE MENG, New York
                        BRAD SCHNEIDER, Illinois
                          RON BARBER, Arizona
                    ANN McLANE KUSTER, New Hampshire
                        PATRICK MURPHY, Florida

                      Lori Salley, Staff Director
                    Paul Sass, Deputy Staff Director
                      Barry Pineles, Chief Counsel
                  Michael Day, Minority Staff Director


                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Chris Collins...............................................     1
Hon. Janice Hahn.................................................     2

                               WITNESSES

Mr. Michael W. Ferguson, President and Chief Executive Officer, 
  Self-Insurance Institute of America, Inc., Simpsonville, SC....     3
Ms. Robin P. Frick, Combined Benefits Administrators, Inc., 
  Madisonville, LA, testifying on behalf of the National 
  Association of Health Underwriters.............................     6
Mr. Thomas Faria, President, Sheffield Pharmaceuticals, New 
  London, CT.....................................................     7
Dr. Linda J. Blumberg, Senior Fellow, The Urban Institute, 
  Washington, DC.................................................     9

                                APPENDIX

Prepared Statements:
    Mr. Michael W. Ferguson, President and Chief Executive 
      Officer, Self-Insurance Institute of America, Inc., 
      Simpsonville, SC...........................................    30
    Ms. Robin P. Frick, Combined Benefits Administrators, Inc., 
      Madisonville, LA, testifying on behalf of the National 
      Association of Health Underwriters.........................    38
    Mr. Thomas Faria, President, Sheffield Pharmaceuticals, New 
      London, CT.................................................    43
    Dr. Linda J. Blumberg, Senior Fellow, The Urban Institute, 
      WAshington, DC.............................................    48
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    Bill H.R. 3462...............................................    81
    Chamber of Commerce of the U.S. of America...................    84
    Letter from Lawrence Thompson, Regional President, POMCO 
      Group......................................................    85
    Statement for the Record from Rep. Bill Cassidy (LA-6).......    87
    Woodland Truck Line, Inc.....................................    89


  SELF-INSURANCE AND HEALTH BENEFITS: AN AFFORDABLE OPTION FOR SMALL 
                               BUSINESS?

                              ----------                              


                      THURSDAY, NOVEMBER 14, 2013

                  House of Representatives,
               Committee on Small Business,
             Subcommittee on Health and Technology,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2360, Rayburn House Office Building. Hon. Chris Collins 
[chairman of the subcommittee] presiding.
    Present: Representatives Collins, Coffman, Luetkemeyer, 
Huelskamp, Hahn, and Schrader.
    Chairman COLLINS. Good morning. I want to thank everyone 
for being with us today, and we want to take a look, I think it 
is very appropriate, at the trend of smaller companies now 
exploring self-insurance as a very viable option to provide 
their employees with healthcare coverage. I appreciate all of 
our witnesses taking time out of their business schedules to be 
with us today.
    Just last week, President Obama apologized to the 4.8 
million Americans who had their insurance policies canceled 
since this healthcare act was enacted. This includes 137,000 
people in my area of Western New York. And while I appreciate 
the president's apology, these cancelations represent just one 
of the many broken promises and severe problems plaguing the 
rollout of his signature legislation.
    The list of issues with this implementation is staggering--
the bumbling of the healthcare.gov website; the 30-hour per 
week definition of full-time employment; the medical device 
tax; the health insurance tax; the cancelation of policies; and 
of large concern to those of us who serve on this Committee, 
small businesses facing significant increases in the cost of 
their healthcare plans, upwards of 55-60 percent in some cases.
    These are not issues that the president and the 
administration will be able to resolve anytime soon. So as the 
confusion continues, small businesses and the people they 
employ continue to be left in the dark about what January 1, 
2014, will mean to them, their healthcare needs, and the cost.
    The subject of today's hearing is certainly not a magic 
elixir that can solve all of these problems for every small 
business, but it could be available option. Amid all of this 
confusion, small firms need as many options as they can find to 
keep their businesses moving forward and make money so they can 
invest in the growth of their companies.
    In a self-insured situation, an employer can choose to 
assume all or a portion of the cost and the risks associated 
with sponsoring a healthcare plan. Under this arrangement, the 
employer forecasts how much it is likely to spend on health 
benefits--it is usually an actuarial calculation--and then 
decides whether or not it makes practical or economic sense for 
that employer to pay these costs out of pocket or to purchase a 
fully-insured product. Traditionally, small businesses have not 
utilized the option to self-insure. According to the Kaiser 
Foundation, only about 16 percent of employees at small firms 
are currently covered by a self-insured policy, as opposed to 
nearly 83 percent of employees at large firms. But with the 
onslaught of regulations, cost increases, and uncertainty 
surrounding fully-insured plans as a result of the president's 
healthcare law, more small businesses may choose to explore 
self-insurance as a manner of providing competitive benefit 
packages for their employees. Some small business owners may 
find that a self-insured policy would be cheaper as it may 
offer them greater flexibility in designing the health coverage 
they want to provide for their employees.
    With that said, there are some potential disadvantages as 
well, such as an instance of higher than expected employee 
claims and additional administrative costs that could 
discourage smaller firms from utilizing the self-insured plans. 
We are not here today to advocate one method over the other, 
but rather we are here to examine if self-insurance is a viable 
for some businesses. When we say if, it really is, but that is 
what we are going to cover today. And so we ought to continue 
to preserve that option for small businesses, especially 
considering the uncertainty surrounding the fully-insured 
marketplaces Obamacare continues to be implemented.
    Again, I want to thank everyone for being here today. I 
look forward to the testimony. And before we do that I want to 
yield to Ranking Member Hahn for her opening statement.
    Ms. HAHN. Thank you, Mr. Chairman. I am pleased that we are 
holding this hearing today.
    The Affordable Care Act introduced many substantial changes 
to health care, and these reforms will improve access to and 
adequacy of coverage, allowing young people to stay on their 
parents' insurance, expanding Medicaid, and not denying 
coverage as a result of a preexisting condition. California 
knows how to do things right. We have already had 59,000 
enrollees in Covered California, so we are ahead of the nation 
in terms of having our website working and people actually 
going online and getting good plans, affordable plans, so we 
are very proud of what we are doing in California.
    The small businesses exchanges will offer opportunities for 
small businesses to provide quality health insurance to their 
employees. At the same time, self-insurance or self-funding 
could be an option for small businesses to offer insurance 
coverage at low prices or with greater flexibility. Though this 
option is not for everyone, it could reduce the cost of 
coverage for small businesses willing to take on that 
challenge. While self-funding has traditionally been more 
common among larger employers than small ones, there is growing 
interest in this method of insurance. However, it is still 
unclear just how many companies have already self-insured in 
response to the law or are planning to do so.
    With the opportunity to minimize risk but still offer 
comprehensive coverage, small entities have expressed an 
interest in learning more about self-insuring. Today's hearing 
will allow us to learn more about how self-insurance works for 
small firms and what factors they must consider before deciding 
to move in this direction. We will also hear from witnesses 
about the benefits and pitfalls of self-funding for employers 
and what role health reform plays in these decisions. While 
this option holds promise for small firms, experts have 
indicated it could prevent much needed consumer protections 
from applying to workers in small entities. For that reason, we 
will also discuss how self-insurance could affect these 
companies' hardworking employees. As we examine this very 
important insurance alternative, we are looking for feedback to 
see how it will impact small employers and how we can ensure a 
broad range of insurance vehicles.
    I thank all the witnesses for being here today, and I look 
forward to your comments. Thank you, and I yield back.
    Chairman COLLINS. Thank you.
    To begin with, if Committee members do have an opening 
statement, I ask that they be submitted for the record. And I 
would like to take a moment to explain the timing lights that 
are in front of you. You each have five minutes to deliver your 
testimony. The light starts out as green. When you have one 
minute remaining, the light turns yellow. And finally, at the 
end of your five minutes it will turn red. I would ask that you 
try as you can to adhere to that time limit.
    Our first witness today is Michael Ferguson, president and 
CEO of the Self-Insurance Institute of America. Welcome. He has 
been with the association for more than 18 years, and in his 
current role he provides executive management leadership as 
well as serving as the federal lobbyist for the association. 
Mr. Ferguson has significant expertise on self-insurance 
matters related to group health plans, workers' compensation 
programs, and captive insurance companies, and operates his own 
blog which includes original reporting and commentary regarding 
legislative or regulatory developments affecting the self-
insurance industry. Prior to joining SIIA, he was a corporate 
communications specialist for Rockwell International at the 
company's world headquarters. Mr. Ferguson earned his 
bachelor's degree in political science from California State 
University, Long Beach. Thank you for being here, Mr. Ferguson.

  STATEMENTS OF MICHAEL W. FERGUSON, PRESIDENT AND CEO, SELF-
INSURANCE INSTITUTE OF AMERICA, INC.; ROBIN P. FRICK, COMBINED 
    BENEFITS ADMINISTRATORS, INC.; THOMAS FARIA, PRESIDENT, 
 SHEFFIELD PHARMACEUTICALS; LINDA J. BLUMBERG, SENIOR FELLOW, 
                      THE URBAN INSTITUTE.

                STATEMENT OF MICHAEL W. FERGUSON

    Mr. FERGUSON. Well, good morning, Chairman Collins, Ranking 
Member Hahn, members of the Committee. I am pleased to have an 
invitation to come and join you this morning. I think this is a 
very important and timely topic, and I am hoping to add some 
value to the hearing today.
    The couple areas that I am going to hit on in my oral 
comments today is talk briefly about what self-insurance is and 
how it differs from traditional insurance, who self-insures, 
the ACA and self-insurance trends, the advantages and 
disadvantages of self-insurance, and talk about the federal 
regulation of self-insured plans. So the trick will be to do 
that all within five minutes. So let me get right into it.
    Real briefly here, if you are ready to talk about the 
differential between self-insurance and fully-insured, if you 
are an employer and you want to provide group coverage to your 
employees, you really have one of two options. You can do a 
traditional insurance plan where you pay a premium to an 
insurance carrier, and that carrier in exchange for a premium 
basically takes the risk and provides coverage to your 
employees. The alternative is, as an employer, you can say, 
well, instead of paying an insurance company to provide 
coverage for my workforce, I am going to self-insure. In other 
words, I am going to pay the claims out of my own operating 
expenses or trust that I set up to pay the claims. So instead 
of transferring that obligation to an insurance company, the 
self-insured organization basically takes that obligation onto 
itself and pays the claims as they are incurred. So that is the 
differential between the fully-insured and the self-insured 
environment.
    Chairman Collins has already thrown out some statistics in 
terms of the prevalence of self-insurance. Just to pick up on 
that is of particular relevance to this Committee. About 16 
percent of smaller businesses self-insure. That would be 
defined within sort of three to 200 band; that is reported by 
the Kaiser Family Foundation. But what I think would be 
interesting for this Committee to also add, although this is 
the purview of the Small Business Committee, self-insurance is 
not simply a business strategy that the private sector 
implements. Self-insurance is also very prevalent within many 
labor plans--self-insured Taft-Hartley plans that self-insure 
smaller groups as well as many public sector entities, 
municipalities, many of which are self-insured.
    Collectively, it is estimated about 100 million Americans 
receive their health benefits through various forms of self-
insured plans. So the self-insurance market is kind of an 
underreported business story but it is pretty significant and 
it spans, again, both private sector, as well as the labor 
plans, and a third area is municipalities. So it is a fairly 
big marketplace, and so your hearing today is particularly 
relevant.
    So now that we have talked a little bit about what self-
insurance is, who self-insures, I want to go ahead and address 
one of the questions that has sort of been raised by the 
Committee. Obviously, we are here because in the context of the 
Affordable Care Act, what does that mean for self-insurance? Is 
that influencing companies to self-insure? If so, why that is.
    Now, it is interesting. In the last year or two you hear a 
lot of public comments that self-insurance is somehow a loop 
hole to the ACA or this is a way to bypass the requirements 
under the Affordable Care Act. And as my testimony is going to 
demonstrate and hopefully we can get in some Q&A, I actually 
think that is an incorrect observation of the marketplace and 
what you actually see is companies that self-insure actually 
subject themselves to more regulation collectively, not less 
than if they were in a fully-insured environment. And we will 
get into some of that.
    So the question is, well, why are companies looking at 
self-insurance if it is not for some regulatory motivation? 
Well, I think the answer if you talk to companies is that 
particularly in this environment where there is some 
uncertainty in the marketplace, there is cost fluctuations that 
have been at least indirectly influenced by the healthcare law, 
what you find is companies that are migrating to self-
insurance. They want to take more control of their costs. They 
do not want to be subject to an insurance company or a 
government entity dictating to them what my costs are going to 
be, what overages I am going to have. So by self-insuring, you 
are able to take more control over your plan. To the extent 
that you have decided that you want to provide benefits to your 
workers, a self-insured arrangement puts you in the driver's 
seat. You are the one that controls your plan going forward, 
and certainly there is some work to go that we will talk about 
in terms of managing the plan, but basically, it is control. It 
is ownership of your plan which self-insurance provides. So 
that, I think, would be our observation of what is driving 
that.
    There are several disadvantages to self-insurance. I would 
say that not everybody is cut out for self-insurance. There is 
a lot of financial and regulatory requirements that you have to 
adhere to, which is detailed in my testimony, but there are 
also several advantages being self-insured. You can better 
manage your plan, cost savings, and a variety of other things 
that make self-insurance an advantage. Again, not the right 
choice for all organizations, but it is a choice for some.
    So with that I will go ahead and--time is short here. I 
will conclude my testimony, and look forward to answering 
questions from the Committee as they arise. Thank you.
    Chairman COLLINS. Yeah, no, thank you. And we will try to 
cover a lot of these issues. The intent today is really to be 
informative to small businesses. They are in what we call the 
traditional sign-up period right about now trying to figure out 
what they are going to do the first of the year.
    Our next witness is Robin Frick, who is responsible for key 
account management, compliance, and corporate operations with 
Combined Benefits Administrators, an enrollment firm and third-
party administrator, or TPA, that performs insurance carrier 
billing, claims advocacy, and benefits management located in 
Madisonville, Louisiana. Robin is testifying on behalf of the 
National Association of Health Underwriters. She has been an 
active member of the organization for several years and has 
served on the boards of both the local New Orleans chapter and 
the Louisiana state chapter in several different positions. In 
2011, she was accepted onto the National AHU Legislative 
Council, which provides legislative advice, communication, and 
policy positions to the membership, Congress, and the 
administration. Robin received her associate's degree from 
Emory University in Atlanta, her bachelor's degree from 
Louisiana State University, and is certified in transplant 
contract management.
    Thank you for being here. You can begin your testimony.

                  STATEMENT OF ROBIN P. FRICK

    Ms. FRICK. Good morning, and thank you.
    My name is Robin Frick, and I am licensed professional 
health insurance agent from Slidell, Louisiana. I would like to 
thank the Committee for inviting me here today to talk about 
self-funding health benefit plans and whether it is an 
appropriate option for smaller employers. I have been in the 
insurance industry since 1999, and I have spent my career 
helping businesses design and implement self-funded benefit 
plans for their employees. I have also been a part of my 
professional association, NAHU, for 14 years, and I am speaking 
on behalf of all of our members who work on a daily basis to 
help millions of individuals and employers with their health 
coverage needs.
    Regarding today's discussion of self-insurance, health 
benefits, and the small employer, I will be frank that the 
decision to self-fund coverage should not be taken lightly. It 
is a multi-year commitment in which the employer assumes the 
financial risk for providing medical insurance to its employees 
and their families rather than paying an insurer to bear the 
risk. The appropriateness of a self-funding arrangement is not 
only determined by the size of the employer but also the 
financial stability of the employer, his or her risk tolerance, 
and the ability to administer a compliant plan. There is an 
increased interest by smaller employers in self-funding since 
the passage of healthcare reform, but this is a transient time, 
and again at the state level when there are market reforms. The 
outcome of small employer self-funding though as a result of 
market reform measures is still rare.
    Self-funding and stop-loss is not a new phenomenon. It has 
been around long since the days of cargo ships sailing to the 
New World. This new awareness of self-funding and stop-loss 
marketplace stems from the employer anxiety about changes to 
the new healthcare law that may bring to their employee benefit 
offerings such as the new national health insurance tax, the 
``Cadillac tax,'' and the changes to premium rate calculations. 
Self-funding a health plan provides a means to structure 
benefits to meet the specific needs of an employer but does not 
allow employers to escape the impact of healthcare reform.
    Most of the reform laws market protections apply to 
employer groups of all sizes regardless of how they are 
financed. For example, a safety compliance client with 75 
employees in good health and stable age-gender demographic, is 
interested in alternative funding such as self-funding with 
reinsurance in lieu of paying an increase over increase each 
year to fully-insure an insurance policy without experiencing 
the large ongoing claims that would normally directly impact 
the rates. He is experiencing a significant increase each year 
that is not indicative of his employee population.
    On the other hand, an electrical contractor with 50 
employees that has ongoing health, both medical and 
prescription drug claims each year, would not be able to 
financially support a benefit plan in a self-funded 
arrangement. His company may be in a healthy financial position 
now, but if we extrapolate the expected risk two, three, and 
five years out, he will very much risk losing what he has 
worked so hard to grow. He would pass on the assumption of 
risk.
    I have experienced quite the opposite, too. A bank client 
of 170 employees is considering the transition to fully-insured 
from self-funding with reinsurance as they can no longer 
sustain the adverse claims. The impact over the last three 
years has significantly depleted any reserves previously 
realized and gained through their self-funded arrangement, and 
the concern is that they are behind the 8-ball, so to speak, 
and they cannot get ahead. They are tired of assuming that all 
of the financial risk, the administrative responsibilities, and 
the compliance liabilities. The growing interest in alternative 
funding mechanisms has led some self-funded marketplace 
innovation with the development of hybrid level funding plans 
which can ease the transition from fully-insured to self-
funding, and we anticipate further growth and innovation within 
this regard.
    From a compliance and regulatory perspective, although 
self-funded plans fall outside of state-level insurance 
regulation, though they have always been subject to ERISA, 
stop-loss policies are actively regulated by state insurance 
departments and are held legally accountable for marketplace 
conduct; likewise for the licensed insurance professionals 
advising in those arenas.
    In short, as healthcare reform has moved forward, employers 
are looking to gain greater control over their employee benefit 
options and funding mechanisms. I truly appreciate the 
opportunity to provide testimony to your Committee today. I 
consider it a huge honor to be here and a privilege to be able 
to inform you, our elected representatives, how the self-funded 
health insurance marketplace works for employers, both large 
and small.
    Thank you.
    Chairman COLLINS. Thank you very much.
    Up next is Thomas Faria. Is that correct? Faria. President 
and CEO of Sheffield Pharmaceuticals in New London, 
Connecticut. He has been president and CEO of Sheffield, one of 
the nation's fastest-growing contract manufacturers of over-
the-counter pharmaceutical creams, ointments, and toothpastes 
since 2002. In this role, he is responsible for overseeing all 
areas of operation of 160 employees, $30 million pharmaceutical 
products manufacturing company. The responsibility includes the 
absolute authority on all major decisions that affect the 
company and he acts as the public voice in all legal, public, 
and customer relations. Mr. Faria received his B.S. in 
industrial and operations engineering from the University of 
Michigan and his MBA from Bryant University in Smithfield, 
Rhode Island. We appreciate your participation, Mr. Faria, and 
please begin your testimony.

                   STATEMENT OF THOMAS FARIA

    Mr. FARIA. First of all, I would like to thank you for the 
opportunity to speak to you all. I think this is truly a very 
important topic to talk about, especially for small businesses 
because as you review information and some of the topics that 
are most important to small businesses, what usually rises to 
the top is the ever-increasing costs and the unknown costs of 
the future of providing health care for their employees.
    Our experience that got us and Sheffield to try self-
insurance, it really started in 2007. Up until that point, 
every year we would go through and review our health care costs 
and quote them, and we would expect a moderate increase of 5 to 
10 percent on our insurance premiums. In 2007, we had a few 
unfortunate events with our employees. They were using--that 
caused our healthcare costs to go up. In response to that, our 
fully-insured provider increased our rates 25 percent. The next 
year, they were looking to increase our rates 39 percent, and 
when we looked around for any comparable products from their 
competitors, they were even higher. So at that point we took a 
look at and really did a leap of faith knowing that our staff 
were both fairly young and fairly healthy, we went for the 
opportunity to self-insure ourselves, and we have been doing 
that since 2009. What I can say is that so far that has been a 
great decision. We have saved over that four-year period 
roughly $400,000 compared to what we would have paid for our 
insurance premiums. And that is about a 19 percent savings. 
What we did with that savings, really, that allowed us to keep 
our benefits the same. We have a gold quality insurance program 
and we have kept that affordable for our employees.
    When I look at some of the benefits that self-insurance can 
help with small business, first, obviously, there is an 
opportunity to save costs. Secondly, whenever you give an 
entrepreneur or business the opportunity and the information 
that is provided, you give them an opportunity to get 
responsible for those costs and accountable for those costs. 
And so self-insurance allows for some transparency on the 
healthcare costs that these businesses are incurring. This 
allows them to cater, and self-insurance allows for the 
flexibility to change their plans pretty much on the fly to 
adjust their plans for efficiency and also in some cases to 
reduce costs. What self-insurance also does, it allows and 
gives great incentive for small businesses to invest now in 
education and incentives that help improve overall efficiency 
of their programs. As a businessman, I can say that such 
investments usually you would not go and invest in such 
incentives when the benefit may turn out to be your fully-
insured provider. Here we are looking at mitigating future 
costs by providing incentives for people to first go out and 
get physicals yearly, and also we provide incentives for them 
to lead healthy lives. That means checking your cholesterol, 
blood pressure, not smoking, keeping a healthy weight. And it 
is truly these self-insurance plans that allow us the 
flexibility to really kind of cater our programs to the needs 
that we see in our employees and also that we see coming up 
through the data that we are reviewing.
    I thank you and look forward to contributing in any way. I 
look forward to your questions. Thank you.
    Chairman COLLINS. Thank you very much.
    I would like to now yield to Ranking Member Hahn for 
introduction of our next witness.
    Ms. HAHN. Thank you, Mr. Chairman.
    It is my pleasure to introduce Dr. Linda Blumberg. Dr. 
Blumberg is a senior fellow at the Urban Institute's Health 
Policy Center. Her recent work includes a variety of projects 
related to the analysis of health reform and state 
implementation of the Affordable Care Act. Dr. Blum berg serves 
as a senior advisor for the institute's Health Insurance Policy 
Simulation Model, and is also a member of the Health Affairs 
Editorial Board.
    Welcome, Dr. Blumberg.

                 STATEMENT OF LINDA J. BLUMBERG

    Ms. BLUMBERG. Thank you very much.
    Mr. Chairman, Ranking Member Hahn, and members of the 
Committee, I appreciate the opportunity to testify before you 
today. The views that I express are my own and should not be 
attributed to the Urban Institute or its sponsors. My testimony 
draws on my own and my colleagues' analysis of the ACA, some of 
which rely on a 10-state case study effort of ACA 
implementation which the Urban Institute continues, along with 
our colleagues at the Georgetown University for Health 
Insurance Reforms, and some of which relies on the Urban 
Institute's Health Insurance Policy Simulation Model, HIPSM, a 
micro-simulation model that estimates individual and employer 
responses to specific provisions of the law.
    Our analyses lead to the following main conclusions. 
Changes to small group insurance under the ACA intended to 
broaden sharing of healthcare risk across firms. An increased 
premium stability and access to insurance do not in general 
apply to self-insuring firms regardless of size, nor do they 
apply to private stop-loss policies, the product that makes it 
feasible for small firms to self-insure. As a result, small, 
young, and healthy firms will have increased incentives to 
self-insure once the ACA's reforms are fully in place, possibly 
trying to move between self-insurance and healthy years and 
fully-insured products and less healthy ones.
    However, stop-loss policies combined with the self-
insurance approach itself carry substantial financial and legal 
risks for small employers. As such, sales of stop-loss to small 
firms are relatively uncommon today. In fact, many sources in 
our case study were from the insurance and producer communities 
felt it was irresponsible to market stop-loss policies to small 
firms. However, we are seeing increasing marketing activity by 
reinsurers since passage of the ACA, including the emergence of 
bundled products which combined stop-loss coverage with 
administrative services. Many traditional insurers report that 
they do not want to get into this business, but if they see 
their traditional products being undermined they will have to 
participate as well.
    While some states, for example, Colorado and Rhode Island 
in 2013, continue to pass laws due to the risks involved. In 
the vast majority of states, stop-loss coverage is not 
regulated like insurance, and as such, the policies can be 
denied to small firms outright due to their health status, are 
not required to cover specific benefits, are not guaranteed 
renewable, and can charge premiums based upon the claims 
experience of a particular firm with reunderwriting occurring 
frequently.
    Reinsurers can also include lasers that exclude coverage 
for the expenses of a group's highest cost or highest risk 
members. Stop-loss policies may not pay claims until the end of 
the first quarter after the plan year ends, leaving small 
financially vulnerable firms to pay all incurred claims 
upfront. Small employers may be wholly financially responsible 
for claims incurred in a plan year but filed after the end of 
that year once a reinsurance policy ends, leaving the employer 
exposed for large dollar amounts not anticipated.
    Significant increases in self-insurance also pose 
substantial risks to those small firms wishing to remain in the 
fully-insured market, an issue that has led some states to 
prohibit the sale of stop-loss to small firms. And due to these 
risks, in 2012, an actuarial subgroup of the NAIC recommended 
changes to their model law which would set the attachment point 
or deductible for stop-loss coverage at a minimum of $60,000 
per insured individual. Our micro-simulation analysis finds 
that their suggested parameters would, in fact, dissuade the 
vast majority of small firms from self-insuring. Under this 
approach, average premiums in the fully-insured small group 
market would be lower than under a scenario with looser stop-
loss regulations or none at all. If these recommendations were 
implemented in a uniform manner nationally, the fully-insured 
small group market would be roughly one and a half times as 
large and the average fully-insured small group premium would 
be 20 to 25 percent lower than if reinsurance effectively acts 
as unregulated insurance.
    To conclude, self-insurance and unregulated stop-loss 
coverage carries substantial risks for small employers who are 
often already financially vulnerable and frequently ill-
equipped to take on the additional financial and legal risks 
associated with it. It also carries risks of undermining the 
ability of other small firms to purchase affordable coverage 
for their workers in the fully-insured market. A majority of 
states do not regulate the sale of stop-loss insurance today, 
and many of those that do regulate it require minimum 
attachment points well below recent actuarial recommendations.
    In addition, we were unable to identify even a single state 
that currently monitors the sales of these policies to small 
firms, and only one that has plans to begin doing so. The 
Federal government could intervene, prohibiting the sale of 
stop-loss insurance to small employers, requiring its sale to 
small employers be regulated by small group rules, or setting 
minimum attachment points consistent with the new 
recommendations. At a very minimum, the Federal government can 
develop and implement an effective plan for closely monitoring 
increases in small firm self-insurance nationally and by state. 
Given the magnitude of other tasks and time pressures, states 
are not inclined to do so on their own, which means that in the 
absence of a concerted federal effort, states will be 
unprepared to intervene as warning signs increase the time at 
which major market disruptions could more easily be avoided.
    I am happy to answer any questions that you might have.
    Chairman COLLINS. Thank you to all the witnesses. I think 
we can have some very interesting questions. Ms. Hahn and I 
tend to run our hearings a little different than most. Instead 
of going first, which you find with many chairmen and ranking 
members, we like to go last. Our fellow members have busy 
schedules and so I will defer, as she will, to our fellow 
members here and then we will bring up the rear.
    So with that I would like to start with the Congressman 
from Colorado, Mr. Coffman, if you would like to ask some 
questions.
    Mr. COFFMAN. Thank you, Mr. Chairman. I think this is--
certainly having been a former small business owner, that this 
is a very important hearing given all the changes to health 
insurance in America right now under the Affordable Care Act, 
better known as Obamacare. And I would like to ask each of the 
panelists to, if you could, answer relatively quickly, but to 
basically say under the pressures of the Affordable Care Act, 
do you think that self-insurance will grow under--in this new 
environment as a mechanism for small businesses to afford 
health insurance for their employees?
    Start with you, Mr. Ferguson.
    Mr. FERGUSON. Sure. Thank you, Congressman, for the 
question.
    To answer that, I think our view would be that we would 
predict a continued growth in the marketplace, although that 
growth will probably be somewhat moderate just because for 
reasons that some of us have talked about already, stipulated 
self-insurance is not the best choice for all companies, 
particularly small employers. For some it is a great choice. 
But what we are seeing in the marketplace, there is a lot of 
companies that are looking more at self-insurance, and as part 
of that process to evaluate whether that choice is right for 
them, many of them as they sort of go through the process 
realize, well, this may not be the right choice for us so they 
do not go forward with that. But for companies that they have 
the financial viability, they have the sophistication to pursue 
this funding method, it is a good choice. So for that reason, 
since there is more interest generally, I think you are going 
to see a continued growth. But again, I do not see it as a 
wholesale migration. I think you are just going to see more 
companies gradually shift into the self-insurance marketplace.
    Mr. COFFMAN. Thank you.
    Ms. Frick.
    Ms. FRICK. I agree with Mr. Ferguson. I do not know that it 
would actually explode as far as all of a sudden vast rush of 
people to come in to self-fund. The growing interest does not 
necessarily equate to a growing number of new self-insurance or 
stop-loss policies. Just as Mr. Ferguson indicated, you will 
have more people that are looking into it, doing the math, and 
as insurance professionals, that is our job, to help them 
determine the risks and advantages of every kind of funding 
mechanism available to them. So the increased interest is in 
something that is now newer to them than there has been before 
or rather may be available to them than it has been before. You 
still see reinsurance carriers that would provide the stop-loss 
behind it still a little hesitant to come down into the market 
of under 100 or under 50 just because that market space is 
typically not very self-funded friendly from a risk standpoint.
    Mr. COFFMAN. Mr. Faria.
    Mr. FARIA. I guess my answer would be I hope so. But I 
belong to an organization called the Young Presidents 
Organization, and in that organization we have had numerous 
talks about self-insurance, and actually, literally, one of the 
topics was about how to respond to Obamacare, and they were 
actually pointing towards self-insurance as a way to 
potentially mitigate the unknown costs that Obamacare may cause 
in terms of increased fully-insured premiums. I think right 
now, especially right now, when you are looking at a situation 
where the fully-insured providers have an unknown, certainly 
with this website problem and other issues, and of course, the 
issue here with people losing their coverage, they are not 
quite sure what the premiums are going to be going forward. And 
I think right now self-insurance might be a great option for 
some people to mitigate that potential liability of increased 
fully-insured plan premiums.
    Mr. COFFMAN. Thank you.
    Dr. Blumberg.
    Ms. BLUMBERG. Because under the Affordable Care Act price 
discrimination based on health status of a small group is 
prohibited nationally for the first time, the self-insurance 
becomes a more attractive option for firms that have healthier 
than average risks in their firm. And so we do expect there to 
be an increase in self-insurance as a consequence barring other 
intervention, either federally or at the state level.
    I will mention to you that in terms of the uncertainty that 
one of the witnesses was mentioning, the issues with the 
website are very strongly unrelated to the vast majority of the 
small group insurance market which will continue to, in the 
fully-insured market, buy through brokers and agents as they 
have in the past with some percentage going through the 
exchange. But the markets are merged between the exchange and 
the non-exchange small group market. And so anything that 
creates a segmentation of risk between the self-insuring firms 
and the fully-insured firms affects the entire small group 
market.
    Mr. COFFMAN. Thank you, Mr. Chairman. I yield back.
    Chairman COLLINS. Thank you.
    At this point we would like to yield five minutes to the 
Congressman from Oregon, Mr. Schrader.
    Mr. SCHRADER. Thank you, Mr. Chairman. And I appreciate the 
tone of the hearing if I may say so. It is a great idea, great 
topic. I am curious myself to see how this may or may not work 
out for businessmen and women around the country. So I really 
appreciate it.
    First, I guess to Mr. Ferguson, if you could elaborate why 
you do not think this is a loophole in the ACA, and then you 
first comment on how this stop-loss works. It seems to me small 
business to me is something under 50 employees, and you are one 
catastrophic event away from losing your business if you do not 
have big cash reserves. How does that stop-loss really work? I 
would ask Ms. Frick the same question in a minute. Why is it 
not a loophole and why is this remotely possible for small 
business?
    Mr. FERGUSON. Sure. I am glad you asked that question, so 
let us explore actually both of those variations.
    The issue about the loophole is that there is concern or 
express stating that somehow self-insured plans are these 
unregulated entities that are out there and are sort of 
operating in kind of the Wild West. But, the fact is if you put 
a finer point in it, what we are really looking at in this 
discussion is what is the trend. Employers that are moving to 
self-insurance post-ACA. And by definition, those plans would 
be non-grandfathered self-insured plans. We have got two 
varieties--the grandfather and the non-grandfathered self-
insured plans. So all of those plans that are moving to self-
insurance would be non-grandfathered plans, and as such, they 
are subject to almost all of the regulations under the ACA. 
There are a few. There are about three or four that they are 
not subject to, and there are particular reasons why they are 
not applicable to self-insurance. Because essentially, self-
insurance plans are the equivalent of nonprofit health plans. 
They are not in the health insurance business. They are widget 
manufacturers. And so in addition to that, not only are they 
regulated by the ACA, they are also regulated by ERISA. Also, 
HIPAA, COBRA. There are all these other federal laws that 
apply. So if you are going self-insured, you are actually 
subjecting yourself to more regulation, not less, if you are 
looking from a business owner standpoint.
    Now, to your question about stop-loss insurance, 
distinction between stop-loss insurance and health insurance. 
Stop-loss insurance is essentially a liability-type of 
insurance product between the carrier and the employer. A stop-
loss insurance policy does not cover individuals, it does not 
pay claims, and so there is a distinction that you need to keep 
in mind whereby you have got the plan, the self-funded plan, 
and you have the participants within that plan. And those 
participants are in the plan, they get coverage under the plan, 
no matter what the stop-loss insurance arrangements are. The 
stop-loss arrangement is simply a reimbursement mechanism 
between the employer and the carrier. So the fact, any of the 
arrangements of the stop-loss does not affect the plan 
participants, whether there is a laser, which means that the 
employer retains liability for one or more people under the 
plan not subject to liability. It is simply a reimbursement 
mechanism. So that is a financial tool that the employer uses 
and really has nothing to do with the healthcare, per se, 
delivery for the plan participants. I hope that addressed your 
question.
    Mr. SCHRADER. And then, Ms. Frick, if you will chime in. So 
what does it cost? I mean, if the stop-loss companies are 
willing to assume that ultimate risk, you know, I have got only 
so much cash, my employee develops cancer, has this 
catastrophic crippling injury, you know, I do not have enough 
money to pay that, that is the reason I got you as a stop-loss 
insurer or backstop. What does it cost me to have you do that 
and what caveats do stop-loss companies put in to make sure 
they are not on the hook?
    Ms. FRICK. Very good question.
    With a stop-loss arrangement, self-funding, either you are 
going to assume everything without the backstop or reinsurance, 
or you purchase reinsurance just as you said to cover your more 
catastrophic risk. So rates are determined just as you would in 
a fully-insured market from the reinsurance but without the 
medical piece. The medical piece is added in after when you are 
looking at your specific medical claims experience and how you 
can turn that forward for your expected, and then the maximum 
liability over that next plan year.
    So in the reinsurance piece, you are still taking into 
consideration the size of the group, the demographics, the area 
factors, where it is, and just the cost of what you are needing 
to cover. And then, how large of a deductible do you want on 
each bellybutton that is covered on the plan. And then if you 
are in that size market of say 1,000 or less, you are going to 
want the extra aggregate protection that protects collectively 
all of the bellybuttons in the plan. So you have one on each 
and one as the whole.
    So in that perspective there is always--you have to take 
all of that in to develop some kind of fixed premium cost that 
is a known factor over the 12 months. Your claims, you do trend 
out and expect where they will be. It is safe to put a corridor 
so you have a maximum liability to which you maximum would pay 
out, say about 125 percent of where you expect your claims will 
fall, but the reinsurance provides, if I set a deductible on 
each bellybutton as $10,000, then after that $10,000, my plan 
is reimbursed by the reinsurance carrier for anything over that 
expectation. So there is a cost factor. The reinsurance carrier 
is looking at everything, looking at the claims experience, 
what has happened before.
    Now, what is interesting is if you are moving in typically 
that small group market under 100, you do not get the claims 
experience, or if you do, it is very aggregated. It is not very 
specific as we have known in the past. So now it is not a 
guessing game but you are looking at a whole market or a pool 
in and of itself. So now you are having to determine across a 
broad spectrum what do I believe for this area, for this type 
of industry, for these kinds of workers, where should we place 
the deductible level? What do we expect out of them? An oil 
rigger is going to have a much higher risk factor than someone 
who sits behind a desk every day. So those are all taken into 
consideration. But the reinsurance does provide sleep 
insurance. I know at night that my total exposure is X. I know 
if I have an aggregate coverage that my total as a plan is X 
and there are reimbursables. As was noted earlier, just totally 
crippling someone, it does just help to have that something in 
the background.
    Mr. SCHRADER. Sure. Thank you very much.
    I yield back. Very helpful.
    Chairman COLLINS. Thank you.
    At this point we would like to yield five minutes to the 
Congressman from Kansas, Mr. Huelskamp.
    Mr. HUELSKAMP. Thank you, Mr. Chairman. I appreciate the 
opportunity to visit here and learn much more about this topic. 
My first question would be for Ms. Frick. Thank you for being 
here.
    How many years of background do you have in this industry 
and your education that qualifies you for your current 
position?
    Ms. FRICK. Sure. So I have been in the industry ever since 
I graduated from college basically. So a little over 14 years 
ago.
    Mr. HUELSKAMP. Two years ago?
    Ms. FRICK. Yeah, about five. Thanks.
    And I have been active--just from the perspective, I 
started--when I started my career I started out with an 
insurance consulting firm and just started asking a lot of 
questions and moved from the small group space and fully-
insured into our client-size, the middle market space, starting 
to get a mix of self-funding, and then to a larger self-funded 
market space. I was curious. I asked a lot of questions. I like 
to learn, and if I need to educate you about it, I need to know 
what I am talking about. I worked with a managed care company 
for a year so I had a very interesting and in-depth look on the 
inside from how an HMO self-functions. I had a very good 
relationship with the underwriting actuarial departments, so I 
really understand how rates are calculated. What is the value 
of a co-pay? What is a value of the deductible and the out-of-
pocket. And from then, back on the consulting side.
    Mr. HUELSKAMP. Last week in a hearing, for instance, the 
HHS secretary did admit a felon could serve as a navigator 
potentially. How comfortable would you be to call up a 
navigator or visit with them in order to make your healthcare 
decisions?
    Ms. FRICK. Honestly?
    Mr. HUELSKAMP. Yes.
    Ms. FRICK. Not comfortable at all, unless I knew that they 
were a licensed, regulated entity that had to conform to 
continuing education as we have to or a required number of 
hours every two years. And we are subject to market conduct and 
are held legally accountable for what we do, what we say. We 
carry E&O insurance. We have, you know, for any claim against 
us. I want to know that the claim that I am talking to on the 
other line knows exactly what I am talking about or asking the 
questions for. I appreciate if someone does not know and is 
honest and says I do not have that answer but I will find out 
for you, but I would much rather if I am making a big 
healthcare decision, just as an employer or as an individual, 
this is your number two for an employer payroll. This is the 
number two list on your accounting statement. You have got to 
know who you are talking to and who you are dealing with and 
they are going to be able to be objective in helping you 
determine what is best for you.
    Mr. HUELSKAMP. Well, thank you. I share that concern as 
well and hear that from constituents worried about instead of 
the agent they usually rely on or the folks that help manage 
their account at their employer, just worried about a 
navigator, untrained, perhaps for a month, not even that. No 
insurance. I had not even thought about that. I mean, that is 
just a basic requirement of the agents.
    The second question would be for Mr. Ferguson. I am looking 
at a story from my district in Kansas, which is about the 
middle of the country, and a company by the name of Vortex 
Corporation. They work really hard. Their insurance renewal 
date just happened to be July 1st, and they worked really hard 
and made that requirement, did everything they needed to do, 
and then shortly thereafter the administration announced, you 
know what? We are just going to ignore the portion of Obamacare 
that says the business mandate. We are going to put that off. 
Other companies, were they in this situation? And what has been 
the impact of delaying that? I have heard various reports of 
what that has meant for businesses. If you could provide some 
light on that, Mr. Ferguson.
    Mr. FERGUSON. Well, I assume you are referencing companies 
that currently maintain a plan or determine whether to continue 
that plan through 2014. Is that the direction of the question?
    Mr. HUELSKAMP. Yes. In this case, the renewal is July 1st.
    Mr. FERGUSON. Right.
    Mr. HUELSKAMP. And they worked everything they could in the 
law and all of a sudden it was suspended for a year.
    Mr. FERGUSON. Well, what I can simply tell you is 
anecdotal, so disclaimer there, and the companies that I have 
spoken with is that all of the companies that provide or are 
thinking of providing a group health plan, they have run the 
numbers so to speak. They have done the analysis in terms of 
whether they want to start a plan or maintain a plan, and they 
have probably reached some initial conclusions as to whether 
they want to play or pay. But most of those companies are 
taking a wait-and-see attitude, particularly the ones that are 
thinking about that they might drop the coverage and go ahead 
and pay because they are kind of waiting to see what exactly--
how is the experience in the exchanges going to be. For 
instance, for companies that would be considering potentially 
dropping their coverage, one of the things that they are 
looking at is, okay, are the exchanges, are they going to be 
functional? Are they going to be effective? Because that is 
going to impact the decision of the employer. If they are 
thinking, well, if my assumption is that I could drop my 
coverage and there is a viable option for my employees and it 
is easy and you can get your affordable coverage as the law 
anticipated through the exchanges. That might influence my 
decision to go ahead and drop my plan.
    On the other hand, if there is uncertainty in the 
marketplace and the exchanges are not delivering on that 
promise, then that would sort of push them back to maintaining 
the plans. I think if you talk to most companies that are self-
insured that have run successful self-insured programs, their 
preference is to keep their plans just because for no other 
reason it is a value to them. It is a value to retain and 
attract talent. So for those successful plans, they are 
inclined to keep them. But they have all run the numbers. They 
have all had their initial analysis. Most, if not all, will not 
publicly state what their intentions are but in some backroom 
they have a spreadsheet that shows all the different 
variations. And again, as I said, a lot of them are just sort 
of waiting to see how--obviously, there is a lot of uncertainty 
that is going on in the marketplace right now so they are kind 
of waiting to see how this all plays out.
    Mr. HUELSKAMP. All right. Thank you, Mr. Chairman.
    Chairman COLLINS. Thank you.
    At this point we would like to yield five minutes to the 
Congressman from Missouri, Mr. Luetkemeyer.
    Mr. LUETKEMEYER. Thank you, Mr. Chairman.
    Just a couple quick questions here. Mr. Faria, you have a 
plan in place and have been working with it for how long now?
    Mr. FARIA. We have been working with it for over four 
years.
    Mr. LUETKEMEYER. Four years. Okay. How has it been accepted 
by the employees? Do they like it? Do they have concerns with 
it? Mad at it? In love with it? Ready to go for some more? What 
is the story? How do they accept it?
    Mr. FARIA. Well, I think in a lot of ways it is seamless. 
We are just replacing kind of the backend of the insurance. So 
for some businesses, they can choose to keep everything the 
same. You might not even have to tell the employees.
    Mr. LUETKEMEYER. Does it help retention then by having, in 
your situation, a rather seamless transition to this new plan? 
I assume it does not hurt retention.
    Mr. FARIA. Right. I mean, I think as I stated in my 
testimony, the savings that we have gotten from self-insurance 
has allowed us to keep a high standard plan. We consider our 
plan, it qualifies to be a gold standard plan. We have also 
been able to keep that relatively affordable for our employees. 
And so for us we are using our self-insurance as a benefit for 
our employees to help us keep and retain our employees.
    Mr. LUETKEMEYER. Okay. Do you fund the program entirely or 
do you have a reinsurance stop-loss behind your plan?
    Mr. FARIA. Absolutely. We have a stop-loss.
    Mr. LUETKEMEYER. Okay. Very good.
    Ms. Frick, you deal with lots of plans. I know that the 
bigger you get probably the more functional this becomes, the 
more of an option it becomes. How small does it get down to 
where it is really not an option or not something that needs to 
be considered or you need to just go ahead and let the 
insurance company take the risk? What has your experience been?
    Ms. FRICK. Obviously, the larger you are the more credible 
your claims experience is, which that being, it is more 
indicative of where you will be in the future. There is the 
one-in-five rule where one out of every five years you will 
probably tank, you will have a bad one, but for the most part 
you are going to run pretty well. The larger you get, it 
becomes a very predictable number. As you become smaller, your 
claims experience is less--there is more volatility just from 
the perspective that it is less predictable. When you are 
around about 100, 200 employees, you need to gain the time to 
have a plan in place to really see where your trend is going 
because just as was mentioned earlier, you can have the one 
that just blows the whole plan out of place but that one person 
in a smaller group is more damaging to that group than the one 
person in a larger group.
    Mr. LUETKEMEYER. What has your experience been with 
reinsurance? Do most companies have a stop-loss behind them or 
are there companies out there that just take the full risk and 
just let it fly?
    Ms. FRICK. Most will have reinsurance except when you find 
a very large employer with tens and thousands of employees that 
can really financially put it behind them.
    Mr. LUETKEMEYER. Do those companies that participate in 
this, is it more based on the revenue of the company so they 
have more cash flow or is to more based on the number of 
employees?
    Ms. FRICK. More on the financial perspective. What can I 
assume? What is my risk tolerance?
    Mr. LUETKEMEYER. And expense to put this money into--my 
next question is do most of them use a trust fund to put this 
into or do most of them just write a check out of their account 
whenever, you know, they just have a separate bank account and 
then just write checks out of it whenever something happens?
    Ms. FRICK. Sort of that. Both. They have a claims fund. So 
you set your employees--employees still have a premium they are 
paying, and you set that premium based on the claims and the 
administrative costs, just as you are in a fully-insured plan. 
You pay $100 a month in premium. That is encompassing the 
claims that have to be paid, the administrative fees that have 
to be paid all in one lump dollar. You do the same thing on the 
self-funded side. So from an employee's perspective, I do not 
know the difference. I do not know the funding mechanism behind 
the plan. So the claims dollars that you as Mr. Employer are 
withholding from my payroll, for example, are put into that 
separate fund. The administrator who is physically paying the 
claims since the request to the employers in the past however 
often that is--two weeks, one month. You have had these claims. 
Please send the check for this money.
    Mr. LUETKEMEYER. Okay. I am running out of time here. If 
one of you, probably Mr. Ferguson, I would imagine, could give 
me just sort of a thumbnail sketch of how this fits into the 
McCarran-Ferguson act. You know, basically states need to be in 
charge of health care, yet this comes under sort of an ERISA 
situation. So can you give us a thumbnail sketch on what 
applies, what does not apply, how this all fits together?
    Mr. FERGUSON. Sure. As you mentioned, the Employee 
Retirement Income Security Act is the controlling main federal 
regulation that governs self-insured health plans. So as a 
self-insured health plan, you are regulated under federal law 
by ERISA principally but then other laws also apply, including 
as I mentioned, many of the applications and provisions under 
the Affordable Care Act. The McCarran-Ferguson dictates that 
the business of insurance is regulated at the states. So we 
talked a little bit about stop-loss insurance carriers. The 
stop-loss insurance carriers are state-regulated entities. So 
you have the plan that is regulated by the Federal government, 
stop-loss insurance carriers are regulated at the state level. 
Does that answers your question?
    Mr. LUETKEMEYER. Yeah. That just adds to confusion. Thank 
you very much.
    Mr. Chairman, I appreciate your time.
    Chairman COLLINS. Thank you.
    Well, Ms. Hahn and I will now kind of jump in and try to 
connect some of the pieces. I guess, Mr. Ferguson, let me start 
with you because you are the Self-Insurance Institute. Just to 
be clear, an employee designs a self-insured plan. One thing 
that is a big thing, they do not, as I understand it, have to 
meet the eight or 10 minimum requirements of the ACA. If they 
choose to have a self-insured plan, for instance, that does not 
have a free gym membership or does not have maternity care or 
contraceptive coverage, they are allowed to do that. That is 
one of the three or four exceptions. Is that correct?
    Mr. FERGUSON. You are correct. They are exempt from the 
essential health benefits rule. But there is a longer answer. 
They are subject to the minimum value requirement that the plan 
has to provide minimum value for them to meet their employer 
mandate requirement as well as their plan participants to meet 
the individual mandate requirements. So it is sort of an 
indirect sort of regulation in terms of the composition of the 
quality of the plan.
    Chairman COLLINS. So, for instance, if a company had a 
religious objection to providing contraceptive coverage, they 
do not have to do it in a self-insured plan. But the point you 
are making is--I call it the 60 percent rule--their plan 
actuarial still needs to cover 60 percent of the expected costs 
that would be incurred. Is that what you are talking about?
    Mr. FERGUSON. That is correct.
    Chairman COLLINS. Right. So overall it meets the standards 
but not ``one size fits all.'' Each company can design the plan 
they want, which I would like to think is what America should 
be all about.
    Now, today we have community-rated plans which a lot of 
small businesses are in. We have experience-rated plans, which 
obviously is what Mr. Faria had as a fairly large small 
company, 160 employees. He was experience-rated each year, and 
if somehow he had some unhealthy situations, his rates could go 
up, up, up. If you are that 25, 30, 40 employee company, you 
are probably in a community-rated plan. And then you have self-
insured. And maybe now you throw the exchanges in. But is it 
fair to say then experience-rated, community-rated, self-
insured are maybe the three big things out there?
    Mr. FERGUSON. I think that is one way to describe it.
    Chairman COLLINS. And Ms. Frick, if a company at some size, 
like Mr. Faria, he probably would not qualify for a community-
rated plan. Is that correct? They are only going to take him on 
an experience rated plan, so each and every year they are going 
to say what happened this year, look back a couple of years, 
and then design the premium schedule which he could be 
fortunate it goes up 1 or 2 percent or he could have a bad year 
and have it go up 30?
    Ms. FRICK. Typically, the under 100 group size is where you 
are put into that community-rated pool. But when you get over 
the 100 you start jumping out of the pool.
    Chairman COLLINS. All right. So that brings my next 
question. As companies, and actually, I am looking at this in a 
couple of my businesses, on the stop-loss, I do not think any 
small business owner would ever enter into this without stop-
loss. So, and I am sure this may vary state-by-state, location-
by-location, but is there a point at which somebody wants self-
insurance but they cannot get stop-loss? What would that 
employee, you know, like if you had 25 employees, could it be 
if I hired you to go find me self-insurance you might not be 
able to get a competitive stop-loss quote? But if I had 80 or 
100 I could? And is there any generalities there?
    Ms. FRICK. You are right. I mean, that is a fair statement. 
Because the reinsurance carrier is still looking at they are 
assuming some risk at some point in time. So how much is it 
going to cost them on that small group when there is not going 
to be a lot of premium per se to come out.
    Chairman COLLINS. Is there a number, like, one thing we 
hoped to get out of the hearing is--and I am going to talk to 
FOX News today, is maybe some generalities. Is it 25? Is it 50 
employees? Is it 75? Because there may be--there are a lot of 
people looking at options but we do not want to mislead someone 
that has got 10 employees who think they can do a self-insured 
plan and actually get a stop-loss.
    Mr. FERGUSON. That is a great question. It is an obvious 
question. And the answer is a little less precise. And the 
reason for that is as we talked about--now, self-insurance, the 
larger you get on the continuum, you are more likely to be a 
viable candidate for self-insurance. So by converse, the 
smaller you are, the less likely. But you cannot just look 
simply at the employee size. As we talked about a little bit 
earlier, to a large extent is a balance sheet. It is a 
financial decision. And so you may have--let us just take an 
example--you may have a law firm that has 30 or 40 attorneys 
that is cash rich, that has a fairly stable workforce that has 
the financial wherewithal to self-insure. And they may be a 
great candidate to self-insure. Look at the opposite way. You 
may have a much larger employer that is really having 
challenging--does not have much cash reserves. They are a 
larger employer. They may not be viable for self-insurance 
because of their financial condition. So it is tough to sort of 
pin down an exact number. It really is, again, the smaller you 
get on the spectrum it is certainly more difficult. But to the 
extent that again you are strong financially--and the other 
component, too, is, I make the point, is the successful self-
insured companies are largely the ones where the principals, 
the owners, the executives of those companies decide they want 
to take ownership of the plan. They want to roll up their 
sleeves and make the plan work. Because one of the advantages 
of self-insurance is you have the ability to really customize 
your plan and really make it work well, but it takes some 
effort. It takes some time. Your executives are going to have 
to reserve some time. They are going to have to meet with their 
business advisors. They are going to have to evaluate different 
things that they want to incorporate as part of their program.
    So if you have a corporate culture, such as Mr. Faria and 
his company, where the senior executives are saying, hey, 
healthcare cost is a high-ticket item on our P&L, we want to do 
something about it. We understand we are going to have to 
commit the time, and they do that. The smaller firms can be 
successful again if they have the financial wherewithal. But 
the opposite is true. If you are a small business owner and you 
are just looking at this I just want to save costs but I am not 
willing to put the time in, do not do it. It is not going to be 
a good investment for you.
    Chairman COLLINS. So, Ms. Frick, I have got 75 employees. I 
am in a community-rated plan, not experience-rated. I am really 
worried about what my insurance costs are. It is now whatever 
today is, November 14th or whereabouts, and I have got a short 
time to make a decision. So I come to you and I say I really 
want to explore self-insurance as opposed to my community-rated 
plan that I am offering. What do you do? Could you walk us 
through step-by-step like the actuarial calculation? You call 
an insurance company. How do I get stop-loss, et cetera, et 
cetera. What do you bring forward as far as a network, you 
know, renting a network, having a network, the blues, getting 
to. What does the employee seek because he used to a Blue Cross 
Blue Shield card or some other HMO. So walk us through someone 
like me coming to you saying I do not know anything much about 
anything. How do I get started? Where do we go? And what is the 
timing?
    Ms. FRICK. Okay, sure.
    So first, we take your census of eligible employees with 
all their demographic data--age, gender, zip code--so that you 
can do----
    Chairman COLLINS. Number of family members, et cetera, et 
cetera?
    Ms. FRICK. Who is covered under the plan. Then take if any 
kind of experience is available, even on an aggregated basis. 
Take that information into consideration. Take your current 
plan design. Call up reinsurance markets. There are a lot of 
them. And market it. See who bites, who does not. There will be 
reinsurance carriers that say no, this is not a risk area based 
on the industry or the size that we want to take a look at. 
There are others that are willing to take a harder look. So we 
get that information back, look at the contract basis, the time 
period meaning are there claims incurred within 12 months but 
then paid out in 12 months, 15 months, 18 months. Take a look 
at the administrators that you have available. Not every third-
party administrator will pair with a reinsurance carrier, for 
example, so you have to make sure that they match. Then who is 
the pharmacy benefit manager that I want in there? What is the 
PPO network that I can rent? A lot of times with third-party 
administrators, they can bring those pieces to the table for 
you, but certainly, in a self-funded arena you have the option 
to put together those pieces and parts that work best for you.
    On the other side, with market innovation, instead of going 
straight over to the self-funded side, maybe we look at a 
hybrid. Look at something that looks and smells and is self-
funding but still appears or still can function as fully-
insured from a premium payment perspective. For example, there 
are a couple of national carriers out now that have come out 
with something that is like a level funding plan. So it is 
self-funded. There is ASO administrative services in there. 
There is reinsurance. All the pieces and parts, but they set a 
fixed dollar amount every month as far as premium payment 
versus that little volatility you will get in a claims payment 
from a truly self-funded plan. It is a fixed dollar amount. So 
at the end of the contract period, take a look and see, okay, 
if I paid less in premium than was paid out in claims, then I 
have the opportunity to receive a portion of that back. I keep 
it. It is mine. In a fully-insured market, I am sure you all 
are aware that if I pay less in premium that the carrier paid 
out in claims, they keep the money. It is their win. In truly 
self-funded, that is all my money back.
    So this hybrid gives the opportunity for them to get a 
percentage of it back, so a split, for example, with the 
insurance carrier. Now, on those times when the employer pays 
more or more claims are paid out than premium is received, 
obviously there will be adjustment for the next time period to 
account for claims and expected risk going forward. So it makes 
a little bit of an easier transition, so it is more stable 
month-to-month versus the volatility of this month I have 
25,000 in claims, next month I might only have 7 and the next 
month there is 17. It gives some more stability to that 
employer of that 7,500, 150 space.
    Chairman COLLINS. All right. So now how long does this 
take? I call you today. When can you come back at me? Does this 
take a week, a month, two months? What would you say?
    Ms. FRICK. I would like to do it in two weeks or less.
    Chairman COLLINS. Okay.
    Ms. FRICK. My methodology has always been to have a 60-day 
lockout period and an agreement with a reinsurer. Meaning 60 
days before the effective date the plan is going to be set up, 
locked in, and if we are going to have a January 1, then we are 
going to make sure that by October 1st or November 1st at the 
very latest, we know what we are doing, who we are playing ball 
with, where the claims are going, who is the pharmacy benefit 
manager.
    You pointed out a good illustration about everyone is used 
to their Blue Cross card or United Healthcare card and it has 
got that logo on it. Well, the cards that come out still have 
the logo on it. It still has a network attached to it. Now, 
maybe it says ABC administrator where the claims go, but the 
logo for the network is still there, the pharmacy benefit 
manager, such as an Express Scripts, Caremark is still on 
there. So it is still identified by the employee as theirs. The 
pluses in self-funding the employer also throws their log on 
there a lot of times because they are the ones that are 
responsible for the plan.
    Chairman COLLINS. Good. That is I think helpful as, you 
know, again, people are facing this. Right now, Mr. Faria--by 
the way, I am a fellow YPOer. I have been in a little bit 
longer than you. I graduated into once you are 49 years old you 
become a W, world president organization. So I am officially a 
WPOer but long-time YPOer.
    So you are, I am assuming, in a forum group?
    Mr. FARIA. I am.
    Chairman COLLINS. So just out of curiosity, eight or 10 
guys, you all share your information monthly in confidence, but 
without breaking a confidence, I am just curious. How many of 
your fellow eight or 10 forum members are self-insured like you 
are?
    Mr. FARIA. That is forum confidential. Just kidding.
    No, I think there is about two of us out of the eight.
    Chairman COLLINS. Is it a discussion point that is pretty 
active right now?
    Mr. FARIA. A lot of the time. I think, again, as I had 
mentioned, YPO has done more call-out sessions for our entire 
chapter to discuss this point, but definitely--and we also have 
an individual who is affected by the medical device tax and he 
certainly has had some issues with that, of course. So from 
time to time it is a discussion. It is not immediately. I think 
right now everybody has already made their decisions on what 
they are going to be doing. We kind of planned ahead.
    Chairman COLLINS. So now yesterday I did meet with Mr. 
Ferguson ahead of time. He came in a little bit early. We were 
talking about the fact that you, as the self-insured now get 
some interesting information monthly or quarterly. You do not 
know which employee may have gone to the emergency room or 
which employee is on what particular prescription drug but you 
get active information, what your cost drivers are, in some 
kind of aggregated fashion. And as Mr. Ferguson was sharing, 
sometimes, because now you are bearing the cost, you could make 
changes in some way or another that would address to maybe 
incentivize healthier behavior. He gave me the example of maybe 
lowering a deductible to go to Urgent Care, raising a 
deductible to go to the emergency room, because you see, oh, my 
God, I have three employees that just went to the emergency 
room. They should have gone to an Urgent Care. Share with me as 
someone four years experienced into self-insurance how you have 
used that data to either have a healthier workforce or 
incentivize what we would call cost-effective user-driven 
behavior.
    Mr. FERGUSON. Certainly. You gave an example that was one 
of our true success stories. When we gained access to our data, 
we do not usually look at it on a monthly basis and we are not 
reacting like that, but typically, we will evaluate it on a 
half-year basis or so. But when we first got our data and we 
compared the national norms, we realized that our employees 
were using the ER at a higher than national rate. We also were 
given information to realize that it was not actually emergency 
care that they were getting. So that these employees were 
really going to the emergency room for issues that really 
should have been handled by a physician. So we were able to 
structure our plan in a way to incentivize people to go to and 
get a physician. And the benefit of that is obviously I kind of 
look at it as a win-win-win. The overall plan wins because we 
are not spending--typically one ER visit for a common visit we 
are being charged $1,000. The business wins out because we are 
able to reduce that cost. I look at the employee now wins 
because they also have a lower cost but now they are developing 
a relationship with a physician. They are developing a history 
with that physician so that the next time that they come in it 
is not that they are just going up to some stranger in the ER. 
And so this starts to help promote healthy values. And then the 
other win of this is that the overall health system is now 
being used more efficiently. The ER is not being used to cure 
the common cold. A physician is treating that. And so the ER 
can be focused on more pertinent matters.
    Chairman COLLINS. So now, Ms. Frick, if you have a pharmacy 
benefits manager, a formulary, if you will, for your 
prescription drugs, a company could decide I really want--and 
really encourage generic drugs--so I am going to have a plan 
that has got a $5 co-pay for generics but if somebody wants to 
opt into the name brand, have a significantly higher, again 
letting the user make that determination, is that something 
that you could tailor into a self-insured plan?
    Ms. FRICK. Yes, absolutely. And then I would encourage on 
top of that to have lesser language so that you are paying the 
lesser of the co-pay or the retail price of the drug. So you 
are still encouraging people who need their prescriptions to 
fill their prescriptions. Still go get your $4 generics if you 
want to from the Wal-Marts, the Targets, but know that you are 
not going to pay any more than say if our plan has a $10 co-pay 
for generics, that is where your cap is. So it is still 
encouraging the healthy behavior.
    And I will say to a point on employees, when the employer 
is engaged in the plan and they take an active look at where 
there is spend, employees value the plan more. It does not 
matter if now I have to pay $100 to see the doctor whereas I 
paid $50 before, if they can see in other areas where the 
employer is really engaged and understands what is important to 
his employee population, then they are more likely to tailor 
their plan better and you will have the more effective measure 
and usage from the employees. They will stay out of the ER and 
go to Urgent Care or an after-hours clinic more than they were 
before.
    Chairman COLLINS. One last question. If I sign up and I go 
self-insured and a year in I got, you know what, I did not 
quite know what I am getting into, is it very easy or just 
automatic that you could drop that plan at that point and move 
back into a community-rated plan?
    Ms. FRICK. You can. However, you need to make sure that you 
have a run out provision for the claims that were incurred 
before. So you are either electing the terminal liability and 
the run out upfront or you are reserving the option to execute 
it upon the policy termination. You never want to jump in and 
out of self-funding and fully-insured, back and forth. From an 
employee perspective, they do not know how it is, as we said 
before, how the plan is funded, but from an employer and an 
administrative, that would be a nightmare.
    Chairman COLLINS. Okay. Before I go to Ms. Hahn to close, I 
notice that our Congressman from South Carolina has arrived.
    Mr. RICE. I yield my time.
    Chairman COLLINS. All right. I guess----
    Mr. RICE. I yield.
    Chairman COLLINS. Oh, okay. He came to listen. Thank you. 
Mr. Rice, I appreciate you being here.
    Ms. Hahn.
    Ms. HAHN. Thank you. I have certainly found this a very 
interesting hearing. I have certainly learned a lot.
    Mr. Faria--is it Faria? Faria. You all have said it 
differently.
    Mr. FARIA. Faria. Yes.
    Ms. HAHN. So I am just curious about a couple things. Now, 
you talk about having a gold plan, which sounds admirable. How 
does that compare to what the Affordable Care Act is qualifying 
as a gold plan and the benefits that have to be offered?
    Mr. FARIA. To the best of my understanding, that is why I 
am saying gold. I am comparing it to an Obamacare gold plan.
    Ms. HAHN. Okay. So you, even though some of these consumer 
protections under the ACA do not apply to self-funded groups, 
you have decided to cover those?
    Mr. FARIA. Yes.
    Ms. HAHN. So you do not discriminate against someone who 
has a preexisting condition or being a woman.
    Mr. FARIA. Not at all.
    Ms. HAHN. Not at all. So that is admirable.
    One of the things I am interested in, and I do not know if 
Ms. Frick or Mr. Faria could speak to that, so when the 
reinsurance company is analyzing your company and determining 
what they would charge you, what are they looking at and what 
are they charging more for?
    Ms. FRICK. They look at the current plan design or the plan 
design that you have created. And every piece in part to that 
plan has an actuarial value. So there is a value to the plan 
itself, just as we know we have the minimum value at the 60 
percent, so we all understand how that works. But then when 
they look at the potential risk or the health conditions--let 
us say it is a known factor, that we know what some health 
conditions are, there is a dollar amount that is associated 
with the cost of the care of those particular measures. And 
then further, has the employer or its administrator or a 
disease management company helped to take steps to mitigate 
some of those claims? For example, for diabetes management, I 
have put in a plan before where it was not opt in or out. First 
fill of a diabetic drug the patient was put into the plan. They 
were now followed by the nurse. I would rather pay more in 
pharmacy costs as an employer than more costs for the medical 
part because you are going to pay--that person will have more 
medical problems over time if they do not control their disease 
and have disease management with healthier living, taking the 
required medications, have their timely A1 season, something of 
that nature.
    So the reinsurance carrier takes a look at everything so 
they have an understanding of okay, that employer has now 
decided that they are going to have a $50,000 specific 
deductible for each person on the plan. So where does that put 
me after the 50 for this employer, for the diseases or health 
conditions that are contained therein. Where does that place 
me? If I see that the employer is assuming more of the risk 
upfront on the first dollar, then that is better for me. I will 
reduce it a little bit. If I see that I will potentially take 
more on the backend from a reimbursement perspective and now I 
am funding that, then I am going to have to put some more into 
my rates.
    On the flipside, they can also laser, but a laser is just 
putting either a different contract on an individual or a 
higher specific deductible on that individual. They are not 
excluding them from having reimbursable claims. They are saying 
if my specific is at 50 but because Susie-Q's specific--because 
of her conditions is now at 100,000, then the reinsurer will 
start reimbursing after her 100,000 claims and the employer has 
taken the first 100. They are not excluding her from coverage. 
They are not excluding her from reimbursable claims. They are 
just putting----
    Ms. HAHN. What would be some examples of some laser 
contracts?
    Ms. FRICK. Kidney disease. End-stage renal failure. High 
dollar premature babies that have been born that it is obvious 
that they will have longer time for recovery, they will have 
multiple surgeries going forward. Those are typically the two 
highest cost drivers.
    Ms. HAHN. And do you have any laser contracts, Mr. Faria?
    Mr. FARIA. Yes, we do, actually. We had a situation where 
an individual has some cancer and they were lasered. I will say 
that the laser does add some risk to the self-insurance plan. 
You can have a situation where a person gets cancer and then 
the reinsurer comes in and says we are going to laser, meaning 
that their deductible now is let us say 300,000. I will say, 
however, that there are plans out there, and we have actually 
signed one now, that you can have a no laser contract so for an 
additional amount of money you can actually put forth and say 
that next year when we reapply, there will not be any lasers.
    Ms. HAHN. And does your employee who has been lasered, do 
you charge them more?
    Mr. FARIA. No.
    Ms. HAHN. No?
    Mr. FARIA. No, we do not do that.
    Ms. HAHN. So everybody pays the same?
    Mr. FARIA. Right. I mean, we have a tier based off of 
whether you are single or have a family. We also have a tier 
based off of how the person scores on the physical, their 
biometrics, how they are doing in improving healthy living.
    Ms. FRICK. I am sorry to interrupt. May I make a comment to 
your question about lasers and what employees pay?
    Ms. HAHN. Right.
    Ms. FRICK. The employee typically has no idea what their 
laser is. They see their plan benefit design. They see I have 
$1,000 deductible and a $20 office visit co-pay. The stop-loss 
deductibles and the lasering is on the financial funding side 
of the plan. So his employee that might have that $300,000 does 
not know that he is responsible for $300,000 of her first 
dollar claims versus 50 for mine.
    Ms. HAHN. Got it.
    So the other thing that was interesting was you having 
access to the data. Now, you do not have access to the 
individual employee and whether or not they went to the 
emergency room, or you just have a cumulative----
    Mr. FARIA. Right. It ends up being cumulative.
    Ms. HAHN. But do you know who the employees are?
    Mr. FARIA. I would say that you do not have direct names.
    Ms. HAHN. You can figure it out?
    Mr. FARIA. Unfortunately, in a small business environment, 
you do know that a certain employee might have been out and to 
the hospital for a period of time and you will get claim data 
that said this particular surgery happened at that point in 
time.
    Ms. HAHN. Yeah, you know, I have been having an open mind 
about this but that part of it really would bother me as an 
employee. That is a real loss of privacy with your employer. It 
is one thing for your insurance company to have that 
information. It is another thing for your boss to know what is 
going on in your personal life and why or why not you have 
chosen to seek medical care. So that part bothers me. What do 
they feel about it?
    Mr. FARIA. Well, I think in a lot of cases, in fact, most 
of the cases, just the environment that we have created, kind 
of a family culture, in most of the cases----
    Ms. HAHN. I would not want my own family to know when I go 
to the emergency room.
    Mr. FARIA. Yeah. I mean, we are hearing that information 
actually from the employee themselves so that it is not really 
a situation where we are finding out that through nefarious 
means. But I will have to say that is an issue. And just like 
everything, the wrong person with that information can make 
some bad decisions. But now we are talking almost like fraud or 
a HIPAA violation. Somebody has to really kind of break the law 
to really start utilizing that information.
    Ms. HAHN. Right. Except you are not a doctor so you have 
not really taken a Hippocratic oath.
    Dr. Blumberg, so in your report, Small Firm Self-insurance 
under the Affordable Care Act, you present a situation in which 
a stop-loss insurance plan would pay for all medical costs. The 
employers would bear no risk and the stop-loss insurance would 
essentially act as a traditional health insurance without 
several ACA regulations. Would you elaborate a little bit on 
that because I am getting sort of mixed messages here about 
what these stop-loss or these reinsurance companies actually 
are. Are they just reimbursement financial vehicles or are 
they, in fact, acting like health insurance?
    Ms. BLUMBERG. Sure. And I think the lines begin to blur a 
bit. And some of it is the increased incentives for these small 
firms to self-insure under the ACA without other action being 
taken. And the reason is that most states today do not regulate 
the definition of stop-loss insurance, and neither does the 
Federal government. So as a consequence, we are seeing more and 
more ``attachment point'' plans being issued. Some regulators 
in Michigan, for example, informed us that they are seeing not 
only more stop-loss policy forms being filed with regard to 
small firm coverage but with much lower attachment points, as 
low as they have seen $5,000. And so what that means is if 
there is no regulation that defines what stop-loss means, then 
you could sell--not that I am saying these folks do, but you 
could--others could sell a stop-loss plan with a zero dollar 
attachment point. And what that would mean is essentially it 
would act as unregulated health insurance. So if the employer 
that was self-insuring, for example, said I am going to have a 
$1,000 deductible plan, a zero dollar attachment point on a 
stop-loss plan would mean that the stop-loss plan would start 
to reimburse after the individual hit their $1,000 deductible. 
So when you do not define regulatorily what stop-loss is, then 
stop-loss can morph into whatever you want it to be.
    Ms. HAHN. In terms of what the self-insured employer has--
what kind of plan they have created?
    Ms. BLUMBERG. Right. So the self-insured employer can 
decide, okay, as I used as an example, I am going to have a 
$1,000 deductible plan for my employees with a 15 percent co-
insurance on expenses over that just to lay something out 
simply.
    Ms. HAHN. Right.
    Ms. BLUMBERG. And then they can go and buy a stop-loss 
policy that is going to internalize all of the claims that 
would come into the firm beyond what the individual is required 
to pay. But because it is referred to as stop-loss and it is 
sold by a reinsurer, then that means that the individual--the 
individual firm that is providing a self-insured plan to its 
workers, is not subject to the regulations, the premium rate 
regulations, the essential health benefit regulations, the 
actuarial value rules within the Affordable Care Act for other 
small fully-insured firms.
    Ms. HAHN. So if this--and I know in California, we have 
actually passed legislation that would prohibit stop-loss 
insurance from issuing plans with specific deductibles under 
$35,000 to small businesses with less than 100 employees. So do 
you think that kind of regulation is helpful?
    Ms. BLUMBERG. It is helpful. According to the actuaries at 
the National Association of Insurance Commissioners who have 
reevaluated the situation very recently, that $35,000, which is 
helpful, is still too low in terms of the level at which we 
want to dissuade more vulnerable small businesses from taking 
the self-insurance option. And while there are a number of 
regulations under ERISA to which these small self-insuring 
firms are subject, as was mentioned earlier, the issue is 
really that the specific regulations to which they are exempted 
from are precisely the ones that are changing the way that 
small group insurance is priced under the Affordable Care Act. 
So it is not so much the number of them as which ones we are 
actually talking about. And so that is important to keep in 
mind is that once you give people an out to the very rules that 
determine how risk is shared in a small group market, you can 
have a very significant effect.
    Ms. HAHN. And maybe for the whole panel, how do we strike a 
balance between the need to protect firms against unexpected 
costs and the need for an affordable method of insurance for 
small businesses, including small businesses that choose to go 
to the exchanges, and how do more self-funded and reinsurance 
combined, how is that going to affect small businesses going 
onto the small business exchange?
    Does anybody have----
    Ms. BLUMBERG. Well, I can comment. There are very direct 
implications as our analysis showed for those small firms that 
want to buy fully-insured products. Once you have basically an 
outlet from the sharing of risk for potentially the healthiest 
and most financially valued firms. So if you have self-
insurance and it is easy to go back and forth, even with some 
financial risk for the healthy small employers, the 
implications are that the average risk in the fully-insured 
market, which is both the exchange and outside of the exchange, 
the way that a lot of the small employers are buying already 
today, it ends up increasing their risk very substantially. So 
the idea is you can salvage the stability and the security of 
the plans and the average price of the plans that are expected 
to emerge in the new small group fully-insured market by 
limiting the number of small employers who would end up going 
into self-insurance either by increasing the attachment point 
at which they can buy stop-loss coverage or by prohibiting its 
sale for small firms.
    Ms. HAHN. Thank you. Thank you.
    Chairman COLLINS. Well, thank you. Let us see. It is 11:35 
and the president is going on the air as we speak announcing 
that he is going to allow insurance companies to continue to 
offer plans that have been canceled. We will just see where 
that ends up, but I guess that is happening even as we speak.
    I want to thank all the members for speaking today. This 
testimony is very timely, and the issues are real. Certainly, 
Dr. Blumberg does point out that as small employers look to 
control their own costs, to control their own profits and their 
future, in doing so there could be a negative impact on the 
community-rated pools. But I would point out that happens today 
because the large employers are all self-insured. So when you 
really look at what is happening today, that segmentation of 
risk has happened in a huge way because any and all employers 
with over 500 employees are all self-insured. And so it is just 
a true statement as people peel out and they manage their own 
risk as Mr. Faria is managing his and understanding how to 
incentivize good behavior, going to Urgent Care instead of 
emergency rooms. As that happens, the pool of folks left in the 
community-rated pools may get more and more toxic from a 
standpoint of risk and hence, cost. But there is nothing 
perfect in life and I think small business exists to produce a 
product, to make money, to grow their business, create jobs, 
and anything we can do to help small business create jobs by 
controlling their costs is, in fact, the biggest benefit that 
we have and the biggest problem we have in this country today 
is a lack of jobs. So for that reason I know I am going to and 
the Committee will certainly be suggesting to someone--and I 
will pick the number, over 25 employees--to go out and take a 
look at self-insurance. It is not going to be perfect for 
everyone. Buyer beware as was also pointed out. Make sure you 
have got a good TPA. Make sure that TPA has got a good pharmacy 
benefit manager. Make sure that you understand your risk on the 
stop-loss piece, both individually and in the aggregate. And it 
is going to take time but I certainly, as it is mid-November, 
would encourage any and all companies. And as I understand it, 
many could do so and decide to kick it off on April 1st. When 
they sign up for community plan, generally they are not locked 
in. So again, I want to thank you all for coming. I think this 
was very timely and I, to the best of my knowledge, pretty much 
covered, crossed most of the Ts and dotted the Is.
    I will ask unanimous consent that members have five 
legislative days to submit statements and supporting materials 
for the record. Seeing no objection, so ordered.
    The hearing is now adjourned. Thank you again.
    [Whereupon, at 11:18 a.m., the Subcommittee was adjourned.]


                            A P P E N D I X


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    INTRODUCTION AND EXECUTIVE SUMMARY

    Good morning Chairman Collins, Ranking Member Hahn and 
members of committee. My name is Mike Ferguson and I serve as 
President and CEO of the Self-Insurance Insurance Institute of 
America, Inc. (SIIA). I am pleased to join you here this 
morning for such an important and timely hearing.

    SIIA is a national trade association that represents 
companies involved in the self-insurance marketplace, including 
self-insured organizations and their business partners, mostly 
in the small and midsized market segments and represent both 
private employers and union-sponsored Taft-Hartley plans.

    My testimony this morning will address six general areas 
that should be of interest to the committee.

           What is Self-Insurance and How Does it 
        Differ from Traditional Health Insurance

           Who Self-Insures

           The ACA and Self-Insurance Trends

           The Advantages and Disadvantages of Self-
        Insurance

           Federal Regulation of Self-Insured Group 
        Health Plans

           Stop-Loss Insurance Overview and Marketplace 
        Demographic

    WHAT IS SELF-INSURANCE AND HOW DOES IT DIFFER FROM 
TRADITIONAL HEALTH INSURANCE?

    Should an organization wish to sponsor a group health plan 
for its employees or members it has two basic options. The 
first option is to purchase a traditional group health 
insurance policy from a licensed health insurance carrier. 
Under this arrangement, the organization pays the insurance 
carrier a fixed premium and the carrier provides health care 
coverage to the group in accordance with specified policy 
terms. By choosing the traditional insurance option, the 
organization transfers the health care-related financial and 
legal risk to the carrier.

    The other option is to retain the financial and legal risk 
through the use of a self-insured group health plan. This is 
also known as self-funding. Under this arrangement the 
organization pays eligible health care claims as they are 
incurred, either directly like other business expenses or 
through a separate trust. Self-insured employers typically 
outsource claims administration functions and retain stop-loss 
insurance as a financial backstop for catastrophic claims.

    WHO SELF-INSURES?

    According to the 2013 Employer Health Benefits Survey, 61% 
of covered workers in private employer plans receive coverage 
through self-insured arrangements. Of more particular interest 
to this committee is that 16% of small employers with 3-199 
workers are self-insured. This is up slightly from 15% in 2012.

    But self-funding is not limited to the private employer 
marketplace. It is estimated that there are about 1200 union-
sponsored Taft-Hartley health plans serving a variety of 
industries and that more than half are self-insured. And again, 
of particular interest to this committee, many of these self-
insured Taft-Hartley plans are small, with as few as 50 to 100 
members.

    Given these statistics, it's clear the topic of self-
insurance is important to both the business and labor 
communities. And it's also clear is that self-insurance is not 
simply a privilege for the very largest organizations.

    THE ACA AND SELF-INSURANCE TRENDS

    Now that I have provided this general background 
information, let me address a recurring question of what effect 
has the Affordable Care Act had on the decision process of 
smaller employers who may be considering self-insurance?

    Recent pronouncements by many policy-makers and pundits 
that by self-insuring organizations are able to bypass ACA 
regulatory requirements and operate health plans with little or 
no consumer protections are misleading. As my testimony will 
demonstrate, smaller organizations that choose to self-insure 
actually subject themselves to more regulation, not less. In 
this regard, we respectfully dismiss the conclusion by some 
that the decision to self-insure is influenced by the objective 
to ``get out of Obamacare.''

    Rather, it is our view that the ACA is more of an indirect 
factor in the decision to self-insure for smaller 
organizations. This more nuanced conclusion is based on the 
belief that the primary motivating factor of most organizations 
that have or are considering the self-insurance option is that 
they want to take more control over the cost and quality of the 
health benefits they are providing to their plan participants 
over the longer term.

    While we will leave to other stakeholder groups to make 
broader statements about the merits of the ACA, we believe it 
is fair to say that the law has created added uncertainty in 
the health care marketplace and contributes to more acute cost 
fluctuations, at least in the short run. So in this current 
post-ACA environment, self-insurance does provide smaller 
organizations more certainty in their ability to be able to 
continue to provide quality health benefits along with will 
providing them better costs containment capabilities.

    Now that we have established the size and diversity of the 
self-insurance marketplace and provided some general commentary 
on how the ACA has influenced this marketplace, let's talk 
about the advantages and disadvantages of self-insurance in 
order to better understand how organizations must consider this 
plan funding decision.

    DISADVANTAGES OF SELF-INSURANCE

    It's important to state right up front that self-insurance 
is not the right option for all organizations. Smaller 
organizations, in particular, should carefully consider what it 
means to be self-insured.

    Financial Liability

    The primary consideration is that as a self-insured 
organization, you are responsible for paying all eligible 
health care claims incurred by plan participants. While stop-
loss insurance provides for a limited reimbursement mechanism 
for higher cost claimants, the self-insured organization 
accepts all financial liability for the group health plans. 
Simply stated, if you are not prepared to cut checks to pay 
providers, you should not be self-insured.

    Legal Liability

    In addition to accepting financial liability, self-insured 
plan sponsors also subject themselves to significant legal 
liability. Plan fiduciaries (normally organization executives) 
are subject to civil and criminal penalties under the Employee 
Retirement Income Security Act (ERISA) to the extent that plans 
are not administered in the best interests of the participants. 
Simply stated again, if you are not prepared to understand and 
ensure compliance with applicable federal law, you should not 
be self-insured.

    Time and Focus Commitment

    While self-insurance allows plan sponsors more flexibility 
to deliver quality health benefits in a more cost effective 
way, sponsors commit the necessary time and focus to design and 
manage their plans in order to achieve the desired results. So 
the final simple statement is that if you are not willing to 
make this commitment, you will likely be better off in a 
traditional, fully-insured arrangement.

    ADVANTAGES OF SELF-INSURANCE

    There are many reasons why organizations conclude that 
self-insurance is the best health plan funding option, despite 
the considerations noted above.

    More Cost Effective Than Fully-Insured Plans

    A well run self-insured health plan is generally less 
expensive over time compared with the traditional insurance 
options. The ``over time'' caveat is important because claims 
experience often varies from year-to-year. Traditional 
insurance premiums must account for the carrier's marketing 
cost and profit margin, among other cost escalators that are 
not applicable to self-insured plans, as they are essentially 
not-for-profit health plans.

    Plan Design Flexibility

    Federal law provides self-insured plans greater flexibility 
in designing benefit packages that better meet the specific 
needs of their plan participants. For example, organizations 
with a predominately female workforce can structure their plans 
to incorporate more robust health benefits that would be 
utilized by female plan participants. Self-insurance plans can 
also structure more innovative reimbursement arrangements with 
health care providers.

    Improved Cash Flow

    Self-insuring allows claims to be funded as they are paid. 
Fully insured premiums constitute a form of pre-payment. With 
self-insuring, a plan pays health plan costs only after the 
services have been rendered. Insurers set health insurance 
premiums at levels that anticipate projected increases in 
healthcare costs--usually well in excess of the actual rise in 
costs.

    Ownership of Health Claims Data

    Health claims data is extremely valuable for plan design 
purposes. But under traditional insurance arrangements, 
carriers maintain that they own this data and employers cannot 
get access to it. By contrast, self-insured organizations have 
control over this data and can use it to help deliver benefits 
more efficiently and control costs.

    ERISA Preemption of State Regulation

    ERISA provides uniform regulatory stability to employers 
that operate in several states, so those companies do not have 
to adopt a patchwork of design variations to comply with 
various states' requirements. This is particularly important 
for multi-state organizations.

    Incorporation of Value-Based Benefits and Wellness Programs

    As medical costs have skyrocketed, self-insured plan 
sponsors have been taking steps to reduce medical costs by 
emphasizing prevention and maintenance care for chronic 
diagnoses. Employees have the flexibility to design and 
integrate into overall strategies, health risk assessments, 
prevention and wellness programs tailored to the employer's 
specific employee demographics and needs.

    FEDERAL REGULATION OF SELF-INSURED PLANS

    Some health care market observers contend that policy-
makers should be concerned about employers switching to self-
insured health plans and purchasing medical stop-loss insurance 
in order to ``dodge'' requirements and fees applicable to 
fully-insured health plans as provided for by the ACA. They 
further argue that such a trend will contribute to adverse 
selection and therefore compromise the viability of the health 
insurance exchange.

    SIIA believes this analysis is inaccurate based on a review 
of how self-insured plans are actually regulated and the recent 
findings of the RAND Corporation on this subject.

    For purposes of our discussion, we will focus on non-
grandfathered self-insured plans, which by definition include 
organizations who have switched to self-insurance since the 
passage of the ACA. Non-grandfathered self-insured group health 
care plans, regardless of stop-loss insurance arrangements, are 
subject to almost all ACA health care market reforms, 
including:

     Prohibition on annual & lifetime limits

     Coverage of dependents up to age 26

     Prohibition on discrimination based on preexisting 
conditions

     Coverage of preventative services

     Summary of benefits and coverage

     Disclosure of plan transparency

     Right to external claims denial reviews

     Limitations on waiting periods

     Right to provider designations

     Mandated coverage of emergency services

    Of the few ACA health care market reforms that do no not 
apply to non-grandfathered self-insured health plans, there are 
specific reasons why as follows:

    Medical Loss Ratio - As self-insured plans are essentially 
non-profit entities with the fiduciary requirement to use plan 
assets for the exclusive benefit of the plan participants, 
there is no ``profit margin'' to regulate.

    Review of Rate Increases - Again, as self-insured plans are 
non-profit entities and prohibited from using plan funds for 
any other purpose, sponsors have no incentive to increase rates 
any more than the rate of increase of medical claims and 
expenses.

    Essential Health Benefits - Existing federal law (ERISA) 
explicitly declares that self-insured group health plans should 
not be subject to state law. The ACA delegates the 
establishment of EHB standards to the states. Self-insured 
plans are subject to other federal mandates, so if Congress 
intended these plans to subject to EHB requirement the law 
would have been drafted accordingly. That said, self-insured 
groups health plans are subject by the ACA's minimum plan value 
rules and cannot establish coverage dollar limits on benefits 
that are deemed to be EHBs. Finally, self-insured employers 
have a significant human resource incentive to offer quality 
health benefits.

    Self-insured group health plans (grandfathered and non-
grandfathered) are highly regulated by other federal laws such 
as ERISA, HIPAA and COBRA that existed prior to the ACA. 
Consumer protection requirements/mandates under these laws 
include:

     Prohibited from denying coverage based on 
preexisting conditions

     Prohibited from discriminating on cover based on 
health status

     Mandated internal review procedures

     Privacy protections

     Plan fiduciary standards

     Prohibited from rescinding coverage for non-
fraudulent purposes

     Continued access to coverage post job termination

    Will Self-Insured Health Plans Contribute to Adverse 
Selection With Health Insurance Exchanges?

    It is SIIA's view that there may be many factors which 
could contribute to adverse selection among the federal state 
health care exchanges but the growth in the self-insurance 
marketplace is not one of those factors.

    In support of this view, RAND Corporation concluded in a 
2012 report that if small groups have the option to leave the 
insurance exchanges to self-insure, there would be no negative 
effects in terms of pricing for the remaining groups--no 
adverse selection would result. A key excerpt of the report 
follows:

          ``However, eliminating the option to self-insure does 
        not substantially reduce premiums on the SHOP 
        exchanges. This is because when self-insurance is not 
        an option, most firms that would otherwise have self-
        insured decline to offer coverage rather than moving to 
        the exchanges. This result is driven by the assumption 
        that self-insured workers have low health insurance 
        costs relative to wages. Although the majority of 
        people who would otherwise have enrolled in their 
        employers' self-insured plans find coverage elsewhere, 
        these enrollees are spread out across other employer 
        policies, individual exchanges, SHOP exchanges, and 
        Medicaid. As a result, they have little effect on the 
        cost of premiums.''

    STOP-LOSS INSURANCE OVERVIEW AND MARKETPLACE DEMOGRAPHICS

    Stop-Loss Insurance Overview

    As referenced earlier in this testimony, virtually all 
smaller and mid-sized self-insured organizations retain stop-
loss insurance to provide a financial backstop to guard against 
catastrophic claims. In this regard, I believe it would be 
useful to clearly explain what stop-loss insurance is and how 
it differs from traditional health insurance as it is more 
closely related to liability insurance products than health 
insurance products.

    Quite simply, stop-loss insurance provides financial 
reimbursements to self-insured organizations for health care 
payments that exceed pre-determined levels, known in the 
industry as ``attachment points.'' Stop-loss policy attachment 
points can either be for specific plan participants and/or for 
total claims incurred by the plan, known as ``aggregate.''

    Unlike health insurance, stop-loss insurance does not cover 
individuals nor pay health care providers regardless of 
attachment point levels. It can only reimburse the sponsor or 
the plan for health payments in excess of the attachment point.

    Stop-Loss Insurance Marketplace Demographics

    Milliman released a report earlier this year commissioned 
by the Self-Insurance Educational Foundation (SIEF) 
highlighting key policy characteristics found in the U.S. 
employer medical stop-loss (ESL) market. The underlying policy 
data was provided by eight of the largest stop-loss carriers 
which collectively represent approximately 50% of the market. 
Milliman therefore assumed that the data is a reasonable 
approximation of the entire ESL market. A summarization of this 
data revealed the following:

           Employers with 100 or fewer covered 
        employees represent approximately one-quarter of the 
        ESL market if the market is measured by count of 
        employers. If measured by covered employees, however, 
        that same segment represents only 2% of the ESL market.

           Most ESL purchasers obtain both specific and 
        aggregate stop-loss. However, employers with over 1,000 
        employees are more likely to purchase specific stop-
        loss without aggregate. Very few employers found in the 
        underlying data purchased aggregate coverage without 
        specific stop-loss.

           The data included employers that purchased 
        specific deductibles ranging from $5,000 to $2,000,000. 
        However, 81% of employers purchased deductibles of 
        $50,000 or greater.

           The median specific deductible found in the 
        calendar year (CY) 2012 data across all plans was 
        $80,000. For groups with 50 or fewer covered employees, 
        the median deductible was $35,000. For groups of 51-100 
        employees, the median was $45,000.

           Less than 0.2% of specific stop-loss 
        policies had specific deductibles of $10,000 or less. 
        About 0.3% of specific stop-loss policies were written 
        with specific deductibles of less than $20,000.

           The data included employers that purchased 
        aggregate corridors ranging from 110% to 200% of 
        expected claims. By far, the most common corridor 
        (found on 90% of policies with aggregate coverage) was 
        125% of expected claims.

    CONCLUSION

    In conclusion, I would like to thank the committee again 
for this opportunity to provide input on the increasingly 
important topic of self-insurance and I look forward to 
addressing any questions you may have. Additional Information 
about self-insurance can be accessed on-line at www.siia.org.

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    INTRODUCTION AND EXECUTIVE SUMMARY

    Good morning Chairman Collins, Ranking Member Hahn and 
members of committee. My name is Thomas Faria and I am 
President and CEO of Sheffield Pharmaceuticals. I would like to 
thank you for this opportunity to speak with you today with 
regards to my experience on utilizing self insurance options to 
provide affordable health insurance to the employees of my 
company. I believe that self insurance can be a powerful option 
to help the right small businesses understand and control the 
continuously growing burden of health care costs.

    My Testimony this morning will address four general areas 
that should be of interest to the committee.

           A brief background on Sheffield 
        Pharmaceuticals

           Sheffield's experiences that led it to 
        decide to self insure

           Sheffield's experience with self insuring

           My opinion on and examples of the benefits 
        of self insurance for small businesses

    COMPANY BACKGROUND

    Sheffield Pharmaceuticals is a family owned, mid-sized 
manufacturer of over the counter toothpastes, creams and 
ointments located in New London, Connecticut. Sheffield has a 
proud history of manufacturing in New England with the company 
originally being founded in 1850 by its namesake Dr. Washington 
Wentworth Sheffield, the man who is also credited with being 
one of the first inventors of toothpaste. For over 160 years 
Sheffield has strived to provide quality, affordable, domestic 
made health and beauty products to the American consumer. 
Today, Sheffield manufactures and sells over 22 different types 
of tubed drug products to every major retail and discount store 
chain in the country. Over the past decade Sheffield has grown 
to a company with roughly $30 Million in revenue and an 
employer of 162 workers. Sheffield provides health insurance to 
75 of these employees and their families.

    SHEFFIELD'S DECISION TO SELF INSURE

    Like all big and small businesses, every year at the 
beginning of spring, Sheffield would evaluate its health care 
costs and send its health insurance plan out to bid to try to 
gather competitive quotes. While, every year a modest increase 
was expected, starting in 2005 the increases began to average 
over 10% per year. At times we would look to lessen the blow of 
this increase by either increasing the employees' share of 
premiums or by cutting back on some of the benefits. This 
worked somewhat effectively until 2008. In that year, a small 
amount of employees in the company experienced significant 
health issues which drove our utilization up. In response, our 
existing health insurance provider increased our rates 25%. 
This was followed up in 2009 when our provider told us that due 
to our high utilization our rates would increase 39% while 
other providers quoted higher. The company began at that point 
earnestly looking at Self Insurance as a viable option. We 
weighed the potential positive benefits of being able to gain 
greater awareness and mastery of our total health care costs 
versus the potential negatives of not having a fixed cost to 
budget along with the potential for a catastrophic occurrence 
to severely impact our costs. We knew that, due to the 
relatively good health of our employees, the odds of having 
another high utilization year were very low. When we asked our 
insurance broker if he expected the insurance provider to 
reduce premiums following a better utilization year and he 
answered no, the decision to move to self insurance became an 
easy one for the company.

    SHEFFIELD'S EXPERIENCE WITH SELF INSURANCE

    While switching to self insurance provided a new set of 
challenges and has at times been a bit nerve racking in high 
utilization years, our decision to self insure has been a good 
one. Based on estimates of the yearly average increases that 
the traditional health care plans charged in Connecticut for 
plans of our size, we believe that self insuring saved the 
company over $400,000 over the span of four years (see exhibit 
A). This dollar figure amounts to roughly a 19% savings over 
the expected costs of insuring traditionally during this 
period. Our success with self insurance has allowed the company 
to realize savings which have allowed it to still provide 
``Gold'' caliber insurance coverage to its employees that 
covers 75% of the total health care costs, all while holding 
the overall costs to the employees in check.

    BENEFITS OF SELF INSURANCE TO SMALL BUSINESSES

    There are many benefits that self insurance can have for 
businesses that have the right conditions and mindsets to 
utilize it. First, as shown above, self insurance can have the 
ability to save individual business plans considerable costs. 
This however comes at the expense of having health insurance 
costs fixed for a period time. Secondly, it allows access to 
cost data that can show not only where a company spends it 
health care dollars but also allows for comparison against 
national norms. When a company knows these costs it becomes 
more responsible for them. Thirdly, this cost transparency can 
allow a business to develop its individual plan to educate and 
incentivize its consumer activities to most efficiently use 
health services, reducing both the business's, consumers' and 
overall health system's costs. Finally, self insurance 
encourages companies to invest now in education, incentives for 
healthy6 living and preventative care to help promote long term 
healthy behavior changes in its workforce. This leads to better 
lives for their workers and hopefully can help stem off major 
and expensive health issues in the future.

    A perfect example of the benefits of the transparency that 
self insurance provides small business occurred when after a 
year of utilizing self insurance we examined our data on health 
costs. The data showed that our employees had a higher 
utilization of the Emergency Room than what should have been 
expected. Further analysis showed that some employees were 
utilizing the ER for non emergency care items that normally 
should be handled by a physician, who typically charges a 
quarter of what hospitals do. By doing this, not only were 
these employees unknowingly increasing the costs to themselves 
and the plan but also they were negatively impacting their 
future health by not creating a regular relationship with a 
primary physician. By adjusting our plan to incentivize 
employees to find and utilize physicians instead of the 
emergency room, Sheffield was able to use its health data in a 
way that reduced overall employee and plan costs while also 
benefiting the current and future health of its employees.

    As an example of how self insurance motivates companies to 
invest more into the health of its employees, once Sheffield 
had committed long term to being self insured, we established 
several programs aimed at educating and incentivizing healthy 
habits amongst our employees. Along with paying for yearly 
physicals, Sheffield also rewarded employees who received 
yearly physicals with reduced premiums. This allowed employees 
and their physicians an opportunity to develop a health history 
and address potential major health issues before they occur. In 
addition to the physicals, Sheffield has developed rewards 
programs for employees that work towards maintaining healthy 
biometric levels, including cholesterol, blood pressure, body 
mass index and smoking activity. By addressing these important 
health factors now we believe our employees' future health can 
be dramatically improved. I do not believe that if Sheffield 
was in a traditional insurance plan we would have invested in 
these activities as the present day costs would have not 
translated into long term savings in a traditional plan.

    CONCLUSION

    In conclusion, I would like to thank the committee for the 
opportunity to speak with you on a topic that I believe can and 
should be an important part of helping solve America's health 
insurance woes.

    Sincerely,

    Thomas Faria
    President and CEO
    Sheffield Pharmaceuticals

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    Mr. Chairman,

    I want to thank you for holding this hearing and 
highlighting the value of self insurance as an affordable 
option for small businesses seeking to provide their employees 
with quality health care.

    As a former Chairman of the Self Insurance Institute of 
America (SIIA), a former senior executive of two large Blue 
Cross health plans and a former owner and current operator of a 
third party administrator, I can tell you that self insurance 
is an important model that is being adopted rapidly all over 
the country. Given my extensive experience owning and operating 
third party administrators (TPAs), I can tell you that not only 
do self-insured plans provide businesses with an opportunity to 
generate significant savings but they provide employers with 
more flexibility to customize health care benefits for their 
employees.

    The commercial health insurance market has been steadily 
moving from fully insured to self insured for over three 
decades. Today 61% of all employers in the U.S. self insure and 
the small group health insurance market is looking to self 
insurance as a more attractive method of providing health 
benefits to employees. According to the Kaiser Family 
Foundation, 16% of small businesses currently self insure their 
medical benefits. Many industry consultants believe that the 
cost advantage of self insuring will drive the small group 
market to over 50% self-insured.

    As a former senior executive of health plans, I can attest 
that the trend toward self insurance is undesirable for the 
large national health insurance carriers. The reason for this 
is that these large health insurance companies make much more 
money from fully insured clients than self insured clients. In 
many cases, I have seen that these companies make 300% to over 
500% more profit on fully insured books of business compared to 
self insured business. Fully insured small employers with less 
than 500 employees are generally the most profitable groups for 
the insurance carriers. Needless to say, they have a strong 
financial interest in deterring smaller employers from making 
the switch to self insurance.

    Traditionally, self insurance is about 4-10% cheaper than 
buying a fully insured health policy, and given the costs of 
Obamacare that self insured plans avoid, this savings advantage 
is projected to grow to over 15%. Yet despite these significant 
savings, many states are trying to limit access to smaller 
employers. Add to this that some health insurance carriers, 
through pervasive market practices, are artificially inflating 
costs for self insured plans.

    In an attempt to protect their profits, some plans use 
tactics to block their self insured clients from enjoying free 
and open choice of vendors for their health plan, even though 
when an employer self funds, they should have full control of 
how their dollars are spent. Since the insurance company is 
only providing administrative back office services like claims 
processing for self funded groups, not taking risk, this 
practice is very restrictive.

    For example, some carriers block independent specialty 
service companies from offering medical cost saving solutions 
that would make self insurance even more financially 
attractive. Specialty companies focus on driving cost savings 
and quality improvements within a particular type of medical 
service such as pharmacy, vision, dental, mental health, 
radiology, oncology, fertility, transplant management and 
physical therapy.

    Further, many states ban smaller group self insurance or 
create limitations by artificially forcing larger deductibles 
on reinsurance for these smaller employers. These regulations 
amount to a restraint of trade designed to perpetuate the state 
tax revenue derived from fully insured plans. While many states 
claim they limit small employer self insurance because they 
want to protect those constituents, statistics show that small 
employers can benefit from this alternative insurance and 
strengthen their financial outlook.

    Several large carriers will refuse to release the claim 
experience for their insured smaller employers so that these 
customers cannot get competitive self insurance proposals. This 
practice is common and reflects further restraint of trade by 
these dominant insurers while protecting their bottom lines.

    These regulations and business practices have impaired the 
self insured market, making it much less cost effective than it 
would otherwise be under a truly free and open competitive 
market. I felt it important that the Small Business Committee 
is made aware of these detrimental market practices and I 
encourage further investigation. I appreciate your 
consideration of my testimony.

    Sincerely,

    Lawrence Thompson
    Regional President
    POMCO Group
                   House Committee on Small Business


             Subcommittee on Health and Technology Hearing


                           November 14, 2013


                  Self-Insurance and Health Benefits:


                An Affordable Option for Small Business?


                        Statement for the Record


                        Rep. Bill Cassidy (LA-6)

    Chairman Collins, Ranking Member Hahn and members of the 
committee. Thank you for the opportunity to submit my statement 
for the record. Over 100 million Americans are currently 
covered under self-insured health plans. The trend towards 
self-insurance has been increasing for years, with 61 percent 
of the commercial health insurance market currently covered 
under self-insurance. Therefore, it is imperative to understand 
that self-insurance market and protect it as an option for 
businesses throughout the country.

    Self-insurance provides employers with the flexibility to 
customize their employee health benefits to best meet the needs 
of their workforce. Self-insurance also helps control costs 
because employers can more directly manage programs such as 
wellness programs, which save money and make people healthier.

    Unlike traditional health insurance, self-insured employers 
take on the risk for their employees. It is impossible for the 
employer to precisely predict the amount of health claims they 
must provide from year to year. In order to limit the 
employer's exposure, they often buy stop-loss insurance. This 
financial tool is important to provide certainty to employers.

    Moreover, the Obama administration has recently expressed 
interest in regulating stop-loss insurance. As recently as 
August 22, 2013 in a letter to Congress, HHS Secretary Kathleen 
Sebelius confirmed that the department is interested in how 
regulating stop-loss insurance could affect the risk pools in 
the fully insured market. It is concerning that the 
administration is considering limiting access to the stop-loss 
financial tool for businesses. Stop-loss insurance has always 
been a state-regulated insurance tool. Limiting it would have a 
detrimental effect on the self-insurance market.

    In order to protect the self-insurance market, I introduced 
H.R. 3462, the Self-Insurance Protection Act (SIPA). The 
legislation would clarify that federal regulators cannot re-
interpret stop-loss insurance as traditional health insurance 
for the purpose of regulating it. This clarification would 
protect this important financial option and provide certainty 
for thousands of businesses across the country. The legislation 
is supported by the Self-insurance Institute of America (SIIA) 
and the U.S. Chamber of Commerce.

    Again, thank you for the opportunity to include this 
statement for the record. Also included are H.R. 3462, and a 
letter of support by the U.S. Chamber of Commerce.

    Sincerely,

    Rep. Bill Cassidy (LA-6)

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