Financial Risk and the Decision of Small Employers to Self-Fund Health Insurance

Health expenditures are a key source of financial risk to employers in the United States because many employers self-fund their health insurance. Stop loss insurance can mitigate this risk, yet it is unknown how state regulations governing stop loss insurance influence employers’ health insurance decisions. We study the impact of stop loss regulation in California, which made self-funding riskier for small employers, on health insurance decisions. Using 2002–20 Medical Expendiute Panel Survey—Insurer/Employer Component data and a difference-in-differences design, we evaluate the impact of stop loss regulation on rates of self-funding and health insurance offers among small employers in California. We find that stop loss regulation reduces the probability that a small employer offers self-funded health insurance by an approximate 5 percentage points and reduces the probability that a small employer offers any health insurance by between 1.6 and 4.5 percentage points. Further, we investigate whether the law prevents adverse selection in the fully insured small group market, but do not find statistically significant evidence that the law impacted premiums in this market. Our findings suggest that stop loss regulation discourages small employers from self-funding but may also reduce the probability that small employers offer any health insurance.