Modeling Employer Self-Insurance Decisions After the Affordable Care Act

OBJECTIVE: To present a microsimulation model that addresses the methodological challenge of estimating the firm decision to self-insure. METHODOLOGY: The model considers the risk that the firm bears when self-insuring and the opportunity to mitigate that risk by purchasing stop-loss insurance. The model makes use of a structural, utility maximization framework to account for numerous aspects of the firm decision, and a multinomial probit to reproduce the elasticity of the firm's demand for health insurance. FINDINGS AND CONCLUSIONS: Our simulations provide three important conclusions. First, they project significant increases in self-insurance rates among small firms--presumably induced by the desire to avoid ACA's rate-banding and risk adjustment regulations—only if generous stop-loss policies become widely available. Second, they show that this increase would be due to this hypothetical adoption of widespread, generous reinsurance by the market and not by passage of the ACA. Third, even with a substantial increase of self-insurance rates among small firms, they project negligible adverse selection in the exchanges, as indicated by our finding that the increase in exchange premium is less than 0.5% when assuming very generous stop-loss policies after implementation of the ACA.