Escape from Obamacare

In the next nine months, young Americans — particularly those who believed in President Obama’s promise of health-care “reform” — are about to get the biggest sticker shock of their lives. Come 2014, the year Obamacare is set to go into full effect, young adults could see their health-insurance premiums soar by as much as 189 percent, according to a new study from GOP staffers on House and Senate committees.

The study’s projection in premium increases is based on a compilation of more than 30 studies and analyses from state insurance commissioners, academic economists and actuaries, and benefit consultants who found significant rate hikes for young adults. The respected economic consulting firm Oliver Wyman estimates that 80 percent of adults 21 to 29 years of age who make more than $16,000 a year will pay more for coverage, even after accounting for Obamacare’s subsidies.

Fortunately, there appears to be a partial escape hatch for young workers and others hit by Obamacare’s premium increases, even if they don’t work for big companies. Small firms and the specialized insurers that serve them may have found the lifeboats (to borrow Texas governor Rick Perry’s comparison of Obamacare to the Titanic) to sail away from many of Obamacare’s mandates. In response, Obamacare supporters at the state level are trying to seal the portholes and sink the lifeboats.

A recent New York Times story frets that “federal and state officials and consumer advocates have grown worried that companies with relatively young, healthy employees may opt out of the regular health insurance market to avoid the minimum coverage standards in President Obama’s sweeping law.” When Obamacare supporters “grow worried,” opponents of centralized health care should grow cautiously optimistic. And the phenomenon of small businesses’ self-insuring provides plenty of reason for optimism, provided that Obamacare boosters don’t find a way to shut down the self-insurance.

Why was this escape hatch not closed when the law passed? Quite simply, the administration bureaucrats and congressional staffers who crafted Obamacare greatly underestimated the resourcefulness of small businesses and the insurance entrepreneurs who cater to them.

In order to curb opposition to the legislation from Fortune 500–size companies, the vast majority of which self-insure, Congress exempted self-insuring firms from a number of Obamacare’s taxes and regulations. As a result, as the Times explains, “companies can avoid many standards in the new law by insuring their own employees, rather than signing up with commercial insurers.”

Obama and many Democrats were comfortable with this bargain as long as it was limited to the “1 percent” of large companies. But then, lo and behold, even before the ink from Obama’s signature on the legislation was dry, smaller firms started looking for ways to self-insure, and a burgeoning insurance-services market developed to help them do this. As Yuval Levin notes on NRO, entrepreneurs “are not drones awaiting instructions” but “reasonable people considering their options.” Accordingly, small businesses “have reacted not with indignation at such a regulatory oversight but rather by moving to self-insure.”

Small firms are boarding as fast as they can onto the SS Self-Insurance. And that has the Times and other boosters of the Obamacare Titanic in a tizzy.

Deborah J. Chollet, a senior fellow at Mathematica Policy Research, told the Times that “the new health-care law created powerful incentives for smaller employers to self-insure. This trend could destabilize small-group insurance markets and erode protections provided by the Affordable Care Act.”

Chollet has it exactly backwards. It is Obamacare, with its crushing taxes and one-size-fits-all mandates, that is destabilizing the insurance market, the employment market, and the U.S. economy. The self-insurance lifeboat is a way to contain the damage and ensure that small entrepreneurs aren’t trapped in Obamacare.

Self-insurance for health care and other insurable risks involves setting aside a fixed amount of money to compensate for potential future loss. Traditionally, this has been impractical for smaller firms because the possibility of unpredictable events, such as catastrophic illness, made it too risky for a firm below a certain size to guarantee a worker’s health-care costs.

But now a market for “stop-loss” insurance for firms that self-insure has emerged to address that problem. This type of insurance will reimburse a firm for its employees’ health costs if those costs go beyond a certain threshold, known as an “attachment point.”

While stop-loss insurance for self-insuring firms pre-dates Obamacare, the market has skyrocketed since the law’s passage. And smaller and smaller firms are joining the list of those that self-insure with stop-loss insurance. “Now, employee benefit consultants are promoting self-insurance for employers with as few as 10 or 20 employees,” the Times ominously notes.

What’s more, some of these small firms have had the audacity to say that it is primarily to escape from Obamacare that they are self-insuring. For instance, J. Richard Jones, the president of Label Solutions, an industrial-label printing company with 42 employees in Marshfield, Mo., told the Times he switched to self-insurance “to hold down costs that were going up because of government regulation under Obamacare.”

An apoplectic “How dare they!” has been a common reaction among Obamacare’s strongest boosters. Perennial MSNBC guest Wendell Potter exclaimed in The Huffington Post that self-insurance by smaller firms “has the potential to cause the collapse of [Obamacare’s] exchanges and completely circumvent the intent of Congress.”

Would that this were the case. But self-insurance does not do away with all of Obamacare’s mandates. Firms that self-insure still have to provide their employees with what the law defines as “essential benefits,” including first-dollar coverage for contraception.

Where self-insurance makes a difference is that it offers both smaller firms and younger employees a chance to escape the costs of subsidizing everyone else’s insurance. Under Obamacare’s “guaranteed issue” and “community rating” mandates, insurance companies must take all comers and are severely limited in their ability to price for risk. That means younger and healthier folks will be paying much higher rates.

By contrast, firms that self-insure have to worry about medical costs only for their own workers, and they don’t even have to pay the 3.5 percent excise tax for insurance plans sold on the exchanges. This makes Obamacare boosters such as Potter very angry. “The intent of Congress was to make coverage more affordable and available to all of us, not just the young and healthy,” he fumes.

Potter’s dismissive tone shows how two-faced Obamacare supporters can be when making the pitch to young Americans. Without self-insurance, young adults start their working lives under Obamacare with weights tied around their ankles. There will be fewer jobs for them, as firms will be less likely to take on expensive insurance costs with new hires. And young adults will have to devote more of their earnings to the health-insurance “pool,” preventing them from building the nest egg needed to buy a home, raise a family, and provide for their own eventual retirement and needs in old age.

Unsurprisingly, Obamacare’s defenders are doing all they can to strangle small-business self-insurance in the cradle States are preempted from regulating self-insurance by the Employee Retirement Income Security Act, so left-leaning state lawmakers, in a direct assault on small businesses, are going after the stop-loss plans that enable smaller firms to self-insure.

Bills pending in the Minnesota and Rhode Island legislatures would ban stop-loss insurers from offering policies with annual deductibles under $60,000 per employee — a sum that is easily affordable for big corporations but that could bankrupt smaller firms. This would leave small businesses no choice but to buy employees’ policies on the Obamacare exchanges or pay taxes for not doing so. And that is exactly what Obamacare proponents want.

Eventually, self-insuring small businesses that use stop-loss policies could force Congress and the administration to go back to the drawing board on health care, creating an opportunity for true free-market reform. As Obamacare supporters attempt to close the exit doors, defenders of small business, free markets, and young workers must fight back and pry them open.

— John Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute.