With the launch of California's health insurance exchange (Covered California) and the expansion of its public programs under the Affordable Care Act, it is easy to overlook a core tenet of federal health reform: preserving the employer-based coverage model.

It is unfortunate, then, to see long-standing health coverage choices under attack. In California, lawmakers are considering legislation that could effectively eliminate self-funded health plans as an option for small businesses by restricting their access to "stop loss" insurance -- Senate Bill 161 by Sen. Ed Hernandez, which the Senate Appropriations Committee is discussing Friday.

Unlike previous attempts, however, lawmakers should seize the opportunity to enact reasonable safeguards around the use of "stop loss" without regulating self-funding out of existence for employers who need affordable options.

Self-funding means exactly what it says: An employer pays directly for the cost of health services in lieu of purchasing coverage from an insurance company. Stop loss insurance limits the total cost for health claims for which an employer will be liable, either for an individual employee or the employee group.

This limit serves as a financial backstop for when these costs exceed a threshold known as an "attachment point." Stop loss protection is particularly important for high-dollar, catastrophic claims that could be ruinous for a small company.

Recently, the debate has centered on the role that self-funded plans should play in the post-health reform environment, and it has been driven by misunderstandings about why employers choose self-funding, how these plans compare with insurance plans and the relationship between self-funded plans and state health exchanges.

First, self-insurance offers health cost savings while giving employers the ability to proactively create and manage a customized health benefits program that works best for their employees. Because they pay their employees' health costs directly, employers have a strong incentive to promote better employee health.

Second, self-funding requires employers to comply with strict financial standards, reporting and disclosure requirements. What's more, many consumer protections included in federal health reform apply to self-funded plans as well.

Third, employer self-funding has no demonstrated relationship -- and poses no proven risk -- to California's health exchange. As lawmakers discuss SB 161, they should zero in on producing a bill that does the following:

  • Sets a reasonable minimum attachment that ensures "stop loss" insurance is used appropriately without imposing unnecessary financial risk on small employers. Actuarial estimates support a minimum attachment point of $20,000 to $30,000.

  • Guarantee that employers have the opportunity to renew their stop loss policies and that "self-funded" plans are equally available to all employees.

    These reforms would preserve self-funding as a choice for small businesses while offering safeguards for both the businesses and the employees. Moreover, these reforms will ensure small businesses continue to have an important choice for offering health coverage to their workers.

    Patrick Burns is managing member of Burns Employee Benefits Insurance Services in Oakland.