Self-Insured Medical Plans After Health Reform

There may be a rough road ahead for employers that offer medical benefits to employees through self-insured group health plans. Self-insured group health plans are group health plans that do not shift the risk of the cost of medical coverage from the employer to an insurance provider. Under the typical self-insured arrangement, the employer bears the annual risk for medical claims that exceed the amount of premiums collected, subject to any applicable stop loss coverage. Self-insured plans are common with employers that have a large enough employee population to manage effectively the risk of adverse claims experience.

The tangle of definitions in the Patient Protection and Affordable Care Act,1 as amended by the Health Care and Education Reconciliation Act of 20102 (collectively, the "Act") suggests that a self-insured group health plan (even a so-called "grandfathered" plan) may not qualify as an "eligible employer-sponsored plan" for purposes of the employer mandate provisions of the Act and the related employee excise tax and free choice voucher provisions of the Act. This may be an unintended result, and a technical amendment or regulatory guidance may be necessary to correct this problem. In addition, the Act subjects self-insured medical plans to a host of new substantive and procedural requirements, even for plans that were in existence when the Act became law.

In this client publication, we review some of the implications of the Act for self-insured group health plans sponsored by private employers. We assume our readers have basic familiarity with employer-sponsored plans and the main reform features of the Act. In later publications, we will consider other aspects of the Act that impact employers.

Self-Insured Plans and the Individual and Employer Mandates

A central feature of the Act is the individual mandate, under which most individuals will be required, starting in 2014, to maintain "minimal essential coverage" for themselves and their eligible dependents. Individuals can satisfy the mandate by being covered under a variety of programs, including a number of government arrangements, a "grandfathered health plan" and an "eligible employer-sponsored plan."3

For purposes of the individual mandate, the term "grandfathered health plan" generally encompasses group health plan or insurance coverage in which the individual was enrolled at the time of enactment of the Act.4 This provision implements President Barack Obama's oft-repeated mantra that the Act does not require individuals to give up the coverage they already have.5 While it is unclear from the Act what types of changes in plan terms would cause a plan's loss of grandfathered status, it is clear that an employer-sponsored group health plan (whether insured or self-insured by the employer) satisfies the individual mandate, as long as the individual was enrolled in the plan when the Act became law.6

Less clear, however, is whether an employer can use a self-insured medical plan to exempt itself from the excise tax provisions imposed on employers by the employer-mandate provisions of the Act. Under the employer-mandate provisions, the Act imposes one of two potential excise taxes on "large employers" beginning in 2014.7 The first applies to large employers that do not offer their full-time employees the opportunity to obtain "minimal essential coverage" through an "eligible employer-sponsored plan."8 The excise tax is triggered for any month during which any one of the employer's full-time employees is certified as having purchased coverage on an exchange and has benefited from either a tax credit or cost-sharing reduction.9 The second excise tax applies to large employers that provide minimal essential coverage through an eligible employer-sponsored plan that is generally considered unaffordable for lower income employees under the complex income and cost-sharing rules of the Act.10

Self-insured medical plans can, of course, provide "minimal essential coverage," and that is why a grandfathered self-insured plan can be used to satisfy the individual mandate. However, self-insured medical plans may not fit within the tangled definition of an "eligible-employer sponsored plan."11 And, severe excise taxes may apply to large employers that do not offer an arrangement that qualifies as an "eligible employer-sponsored plan," as defined by the Act.12

So why doesn't a self-insured medical plan meet the definition? To be an eligible employer-sponsored plan, a plan must, among other things, be either a governmental plan (not applicable to private employers) or "any other plan or coverage offered in the small or large group market within a state."13 The Act defines "small and large group market" as the health insurance market under which individuals obtain health insurance coverage...through a group health plan maintained by a large employer...or by a small...