Businees style situation, showing obviously unequal forces of opponents
State insurance regulators could try to save the market for fully insured small-group health coverage by restricting use of stop-loss insurance at level-funded plans.
Sabrina Corlette gives that suggestion in a new paper about the small-group market that she put out with help from Wakely Consulting Group.
Corlette, an analyst at Georgetown University's Center for Health Insurance Reforms, describes both multiple employer welfare arrangements and level-funded plans that cut small employers' health coverage costs mainly by helping employers escape the state benefits mandates and restrictions on health-based underwriting that apply to fully insured small-group plans.
States can choose to regulate MEWAs directly, but, if they want to limit small employers' use of level-funded plans, they will probably have to do that indirectly, by changing the rules for use of stop-loss insurance, Corlette writes.
"This could include a ban on the sale of stop-loss insurance to employers below a certain size," Corlette writes.
She says states could also add regulations that make selling stop-loss insurance to small employers less lucrative.
"If North Carolina is any guide, such regulation can be effective at leveling the playing field between the fully insured and self-funded markets," Corlette says.
What it means: Any state regulators or state legislators who get tired of setting new rules for pharmacy benefit managers could turn their attention to stop-loss insurance and level-funded plans.
The small-group market backdrop: Enrollment in fully insured health plans sponsored by small employers fell to about 12 million in 2021, from 16 million in 2024, according to data in the new paper.
Enrollment in large fully insured plans fell to 41 million, from 44 million, over that same period.
Jeff Smedsrud, the chief executive officer of Flex Benefits, a company that sells supplemental health benefits, predicted earlier this week that, if current trends continue, the market for fully insured, comprehensive coverage for employers with fewer than 10 employees could soon be gone.
A team of economists argued in a paper posted in July 2025 on the website of the National Bureau of Economic Research that employees of small employers might be better off if they got their coverage through insurers participating in a stable, competitive individual health insurance market rather than using employer-sponsored plans.
Corlette acknowledges in the paper that some observers have argued that employees at small employers would be better off buying individual coverage or getting coverage from a new or existing public health coverage program.
One concern is how a shift to increased use of individual coverage or public plan coverage would affect older, sicker, lower-income employees and employees who live in high-cost areas, Corlette says.
MEWAs and level-funded plans: A MEWA is an organization that helps small employers team up to buy health coverage.
It may get a boost from being able to hire top negotiators and offer an insurer access to a bigger pool of insureds, but Corlette contends that most of the savings a MEWA offers come from cutting out costs related to state regulation.
A level-funded plan gives a small employer a relatively simple, predictable way to offer the kind of self-insured health plan that bigger employers have been offering for decades.
The designer of a level-funded plan packages it with stop-loss insurance, or insurance for health plans, with a relatively low attachment point, or stop-loss deductible.
Instead of facing big fluctuations in claim costs, the employer pays a set monthly amount.
If the claims are high, the stop-loss insurance protects the employer against big, unexpected claim costs.
If the claims are low, and the employer does not need to use the stop-loss insurance, the employer may get cash back after the year is over.
Risk segmentation: The current framework for the small-group market exposes the fully insured plan issuers to "cherry picking," or the risk that the MEWAs and level-funded plans will tend to lure away the younger, healthier employer groups and leave the fully insured plans with older, sicker, increasingly costly to insure plan participants, Corlette says.
Cherry picking is also called "adverse selection."
North Carolina tries to fight cherry picking by level-funded plans by keeping stop-loss issuers from selling plans to employers with fewer than 26 employees, paying cash directly to covered individuals or setting specific deductible limits below $20,000, according to a chart posted by the National Association of Benefits and Insurance Professionals.
Barriers to action: Corlette warns that imposing new restrictions on use of stop-loss insurance and small level-funded plans could be difficult.
"Policymakers may find it politically challenging to enact such policies, as insurers and brokers are likely to oppose the threat to a lucrative business model," Corlette says. "There is also the risk that some small employers with level-funded plans will stop offering group coverage, rather than switch to a higher-priced fully insured policy."
States could persuade small employers to continue to offer health coverage by finding ways to make the fully insured small-group plans less expensive, Corlette says.
Possible ways to make fully insured small-group plans less expensive could include adding rate review and rate cap laws, setting up state reinsurance programs, or letting small employers buy into state Medicaid programs or other public health coverage programs, Corlette says.
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