Why Obamacare is likely to fail in Indiana (and most other states, too)

As we all know by now, Obamacare has radically reshaped the health insurance markets with new restrictions on insurers’ worst practices, new markets for individuals and small businesses, and generous subsidies for low- and moderate-income families to buy coverage.

But what if it's all a bit of a sideshow? A lot of heat and light that will, in the end, just not affect that many people?

That’s what Dr. Ben Park, the CEO of American Health Network, thinks. His reasoning? A large majority of people covered by private health insurance get that coverage from employers that actually insure themselves and, as a result, are exempted from most of Obamacare’s new rules.

Health insurance professionals call that self-insuring or self-funding. When an employer self-funds its benefits, they often still hire a health insurer in order to get access to its provider discounts and to process medical bills. Then the employer buys reinsurance that pays any claims that exceed a maximum amount, such as $50,000 or $100,000.

When employers self-fund their health benefits, they are no longer governed by state health insurance regulations, which is the arena that most Obamacare provisions affect. Instead, self-funded employers are governed by a much-less restrictive law known as ERISA.

“That’s why I think Obamacare will fail in Indiana,” Park told me a year ago, noting that about 70 percent of Hoosiers with private insurance were covered by self-funded health plans. I noted his thoughts in a related post last year. And, when I checked back with him this week, he said his view remains the same.

Park is worth listening to on this point. Not only does he run the largest independent physician practice in Indiana. He also spent years working for Anthem Blue Cross and Blue Shield in the 1990s and early 2000s.

And far from being a kind of anti-Obamacare reactionary, Park has embraced the accountable care reforms in the law, forming relationships with Franciscan Alliance and other hospital systems around the state.

But until now I couldn’t find any good data to back up Park’s claim that 70 percent of Hoosiers are already covered. An Anthem spokesman said that sounded about right, but didn’t have any better numbers for me.

But now I do have good data. In April, Citi Research issued a report of total enrollment in actual health insurance plans for every state, based on data filed by each insurer with each state’s insurance department.

I then divided each state’s enrollment by the total number of residents who were reported as being covered by private insurance in each state, according to the Census Bureau’s Current Population Survey.

The result? Park’s estimate is actually too low.

By my calculations, 79 percent of Hoosiers covered by private health insurance are in self-funded plans. Or, put another way, eight out of every 10 Hoosiers covered by private insurance are exempted from nearly all of Obamacare’s new rules.

Indiana ranks third-highest in the nation for self-insurance, behind only Wyoming and West Virginia. You can see results from all states in this spreadsheet.

But lest you think Indiana’s high rate of self-insurance is uncommon, consider these facts.

Out of all 50 states, only 10 have self-funded below 60 percent. And only four states have fewer than half their privately insured residents in self-funded plans. Those four states are North Dakota, California, New York and Hawaii.

And the national average is 60.5 percent. That means six out of every 10 Americans are mostly unaffected by Obamacare’s new rules.

And there is lots of evidence these rates are going higher. Citibank analyst Carl McDonald noted that, nationally, the number of people covered by actual health insurance fell 2 million from 2011 to 2012 and has fallen more than 14 million since 2002.

“The benefits of self-funding are so significant for many employers that we believe risk enrollment will continue to shrink,” McDonald wrote in his research report, which you can read here.

And those benefits got a whole lot more significant this year.

Employers that self-fund their health benefits are not bound by Obamacare’s mandates on essential health benefits, which will save them money versus actual health insurance plans. (All employers do, however, have to cover dependents up to age 26).

Also, self-funded employers and stop-loss insurers will not be subject to the new tax Obamacare will assess on actual health insurance policies sold by insurers. In Indiana, WellPoint expects such taxes to add 2.7 percent to overall premiums.

And for small employers, self-funding may be a way for them to avoid Obamacare’s community rating rules. For employers with younger-than-average workers, avoiding those rules could help them dodge premium increases ranging from 50 percent to 100 percent that could start kicking in this year.

Self-insurance used to be considered an option only for large companies. But now more reinsurers and even traditional health insurers have created new products that allow firms with as few as 10 employees to insure their own health benefits, thus dodging Obamacare’s rules.

“Self-insurance rates are already more than 70 percent,” said Park, the physician CEO. “I think that’ll go up to 90 percent.”

A few caveats are in order. Obamacare is more than just a set of regulations on private health insurance. The law provides federal money to expand government-sponsored health coverage for low-income people. It also slows the future growth of Medicare payments to health care providers and encourages doctors and hospitals to reorganize themselves into tighter-knit organizations that make money by boosting quality while reducing costs.

Those parts of the law could still bring big changes to the health care industry. But since two out of every three people—in Indiana and across the country—has private insurance coverage, the reforms in that area were supposed to be the most impactful.

Some folks think lots of employers will drop their group health benefits altogether, because Obamacare’s tax subsidies for individual insurance will prove a better deal for themselves and most of their employees. S&P Capital IQ predicted earlier this year that by 2020, 90 percent of workers insured by employers will be shifted into the Obamacare exchanges.

But it’s as equally likely that large and high-wage employers will see the exemptions they get by self-funding their health benefits as a competitive advantage when recruiting and retaining top employees. That could preserve health benefits as a standard employer perk and, if Park’s 90-percent prediction proves true, entrench it even more in the corporate world.

If that latter scenario plays out, then Park is right: Obamacare will have failed. Not as conservatives have predicted, with a colossal train wreck or a political uprising. But in a far more mundane fashion. Because lots of people will find it in their interest and in their power to work around it.