1. THE AFFORDABLE CARE ACT AND STOP-LOSS INSURANCE
STATEMENT TO THE NAIC ERISA (B) SUBGROUP
TIMOTHY STOLTZFUS JOST, NAIC FUNDED CONSUMER
REPRESENTATIVE
ERISA’s regulatory exemption for self-insured (self-funded) plans is a persistent thorn in
the side of state insurance regulators. ERISA preempts state law relating to employee
benefit plans, and, although ERISA saves from preemption state regulation of insurance,
the courts have held that self-insured plans are not insurance and are thus free from state
regulation.1 This may be acceptable for large employer groups, which have the
bargaining power and expertise to protect their employees. But when small employer
packages purchase “self-insured” packages from insurers, including stop-loss coverage
with very low attachment points and administrative services, they are essentially
purchasing conventional health insurance, except that it is free from state regulation.
Insurers have always had an incentive to market “self insurance” to healthy groups, and
small businesses with healthy enrollees have always had an incentive to purchase it. The
Affordable Care Act (ACA), however, increases these incentives dramatically in two
ways. Insurers understand this, and are very actively marketing “self-insured” products
to small groups.2
First, self-insured plans are subject to fewer regulatory requirements under the ACA.3
The Affordable Care Act applies to individual and employer coverage. There are four
categories of employers under the ACA—small employers, large employers,
grandfathered employers, and self-insured employers. There are potentially five
employer insurance markets—the exchange market, the small group market outside the
exchange, the large group market outside the exchange, the grandfathered market, and the
self-insured market. (There will also be an individual insurance market in and out of the
exchange).
The small employer markets inside and outside of the exchange are subject to many of
the same regulatory requirements. Whether in or out of the exchange, small group plans
must offer the essential benefits package,4 include their members in a single risk pool,5
participate in the risk adjustment program, 6 offer the same premiums without regard to
health status,7 and offer the precious metal tiers.8 But self-insured plans are not subject to
these requirements.9 They are also exempt from the minimum medical loss ratio
requirements, although self-insured do not technically have loss ratios since they are not
insured.10 Self-insured plans are also exempt from a fee imposed on insurers under ACA
section 9010 and stop loss plans do not need to justify unreasonable rate increases. Small
group plans, therefore, face a significant incentive to achieve self-insured status to avoid
some ACA requirements.
Second, once the ACA establishes guaranteed issue and bans health status underwriting,
and pre-existing condition exclusions for small groups in 2014, the risk to employers of
self-insuring is dramatically decreased. An employer can purchase stop loss coverage
from an insurer and remain self-insured as long as its employees are healthy. Under
1

2. current law in many states, a self-insured small employer faces the prospect of
dramatically increased stop-loss rates and lack of affordable access to conventional
insurance if the group’s risk profile deteriorates (e.g. an employee or dependent gets
cancer or needs an organ transplant). But, beginning in 2014, insurers (in or out of the
exchange) will not be able to refuse to insure such a group or exclude preexisting
conditions, and will have to insure at standard rates. Under proposed regulations, SHOP
(small employer) exchanges cannot have open enrollment periods for employers but must
admit small employers whenever they apply for coverage.11 The threat of adverse
selection to the exchanges will be overwhelming. And so will be the temptation to self-
insure to opt out of state regulation with very little risk.
Although most self-insured plans are large group plans, there is presently no prohibition
under federal law against small group plans self-insuring. Indeed, it is estimated that 7.9
percent of employers with 3 to 49 employees and 20.3 percent of employers with 50 to
199 employees offer at least one self-insured plan.12 Of the 474 self-insured groups
approved by HHS for “mini-med” waivers by July 15, 2011, 109 had fewer than 50
enrollees and 47 had fewer than 25 enrollees.13
The most extensive attempt to date to model the effect of self-insurance on the ACA
reforms was done by the Rand Corporation in the Spring of 2011.14 This study concluded
that if stop-loss coverage is available with attachment points as low as $20,000, 33
percent of employers with fewer than 100 employees would self-insure.15 Rand estimated
that banning self-insurance in the small group market would lower premiums for the
platinum plan in the exchange (which Rand believes will be the most commonly offered
ESI policy) by 3.3 percent.16 The study authors acknowledge, however, that it is very
difficult to accurately project employer responses to the ACA and the effect that these
will have on the exchanges until more is known about the 2014 regulatory and insurance
environment, and they did not model the effect of stop-loss insurance with attachment
points below $20,000.17 It is very possible, indeed likely, that Rand’s estimate is low.
The regulatory problem of self-insurance exists primarily because of the availability of
generous stop-loss coverage. If employers had to actually bear significant risk in
becoming self-insured, small employers would be less likely to pursue it.18 But stop-loss
coverage with low “attachment points,” i.e. amounts beyond which the employer is not at
risk for the costs of any employee, can dramatically lower the risk of “self-insurance” for
employers. As the Rand Study acknowledges, this can draw a considerable number of
small employers away from the exchange--in all likelihood those who present the lowest
risks.19 It also tempts small groups to avoid state regulation by pursuing self insurance.
Federal court cases interpreting ERISA have held that self-insured plans do not lose their
self-insured status simply because the plans have stop-loss coverage. 20 Moreover, a
federal court in Maryland has held that states may not attempt to regulate the coverage of
self-insured plans by regulating stop-loss coverage.21 On the other hand, stop-loss
coverage is insurance, and states may regulate stop-loss coverage just as the do any other
form of insurance as long as they do not try to impose requirements on self-insured plans
by so doing.22
2

3. Although the ACA uses the term “self-insured” in a number of provisions, nowhere does
it define it. The term is also neither defined in the Public Health Services Act nor in
ERISA. The term “self-insured medical reimbursement plan" is defined in the Internal
Revenue Code (which prohibits self-insured plans from discriminating in favor of highly
compensated employees) to mean “a plan of an employer to reimburse employees for
[medical] expenses . . . for which reimbursement is not provided under a policy of
accident and health insurance.”23 Federal regulations implementing this provision clarify
that a plan is not self-insured simply because it is experience-rated, but that an employer
does not lose self-insured status simply because it is administered by an insurer if risk is
not transferred to the insurer.24
Both the Labor Department and the courts have recognized that stop-loss coverage with
very low attachment points can make self-insured status a sham, although the limits are
far from clear.25 Insurers are selling “self-insured plans” to employee groups with as few
as ten members and with attachment points so low as to appear to be sham self insurance.
The prevalence of these plans may greatly increase as 2014 approaches -- the effective
date of the, essential benefits coverage requirement -- and small group plans seek to
evade this requirement. But states may regulate, or even prohibit, stop-loss insurance
whether or not it is a sham, as long as they do not try to direct the terms of self-insured
plans (for example, to impose coverage mandates) by so doing.
The problems posed by self-insurance could be addressed by the federal government.
Either the Department of Labor or Treasury or both could draft regulations defining “self-
insured” plan so as to clarify that a plan must actually bear risk to be self-insured. The
DOL concluded in advisory opinion 2003-03A that an insurance company that purported
to offer 100 percent reinsurance coverage to “self-insured” ERISA plans was in fact an
insurance company insuring an insured plan, and was subject to state regulation.26 The
DOL and Treasury should go further and define self-insured plan so as only to permit
employers to self insure if they can legitimately bear a substantial share of the risk of an
employee health benefits plan.
This issue can—and should—also be addressed by the states. The most straightforward
approach would be to simply ban the sale of stop-loss insurance to small groups.
Delaware,27 New York,28 and Oregon29 currently ban the sale of stop loss insurance to
small groups, so there is ample precedent. Alternatively, the current NAIC model stop-
loss law could be strengthened to ensure that stop-loss insurance attachment points are
high enough to ensure that it is true stop-loss insurance and not a sham.
The NAIC should amend its model stop-loss coverage law to prohibit the sale of
stop-loss insurance to small groups. Failing this, the NAIC should update its model
law to for the inflation that has occurred since the amounts in the model law were
established in 1995. The most realistic measure of inflation would be the increase
that has occurred in the cost of health insurance since 1995, which has doubled from
$1.06 per hour worked to $2.12 per hour worked. Alternatives would the increase
in the medical care CPI of 83 percent or, at the very least, of the CPI of 48 percent.
Minimum attachment points if doubled would amount to $40,000 for individual
3

4. claims and for aggregate claims to the greater of $4000 times the number of group
members, 120 percent of expected claims, or $40,000. The model law could be
amended to offer states both alternatives.
States should then adopt the amended model law to require stop-loss insurance to in
fact be legitimate stop-loss insurance, not comprehensive insurance masquerading
as stop-loss insurance. To date, only three states have adopted the NAIC model act,
while only 18 have taken related legislative or administrative action. The NAIC
should alert states to the growing threat to state health insurance regulation posed
by self-insurance, and urge states to adopt the NAIC Model Act. This is clearly an
issue that requires attention from state regulators and legislatures.
1
Under 29 U.S.C. ' 1144(b)(2)(B). See FMC Corporation v. Holliday, 498 U.S. 52 (1990).
2
See, e.g. http://www.assuranthealth.com/corp/ah/HealthPlans/SESelfFunded.htm.
3
See Kathryn Lineham, Self-Insurance and the Potential Effects of Health Reform on the Small Group
Market, (NHPF 2010), http://www.nhpf.org/library/issue-briefs/IB840_PPACASmallGroup_12-21-10.pdf;
Timothy Stoltzfus Jost, Health Insurance Exchanges and the Affordable Care Act: Eight Difficult Issues
(Commonwealth Fund 2010), available at
http://www.commonwealthfund.org/~/media/Files/Publications/Fund%20Report/2010/Sep/1444_Jost_hlt_i
ns_exchanges_ACA_eight_difficult_issues_v2.pdf
4
PHSA ' 2707(a), added by ACA ' 1201.
5
ACA ' 1312(c)(2).
6
ACA ' 1343(c).
7
ACA ' 2701(a)(1), added by ACA ' 1201.
8
PHSA ' 2707(a), added by ACA ' 1201, and ACA ' 1302(a)(3).
9
This is because these provisions only apply to insured plans. See PHSA '' 2707, added by ACA ' 1201;
ACA ' 1301, ACA ' 9010.
10
PHSA ' 2718, added by ACA ' 1001; ERISA ' 715(b) added by ACA ' 1563(e) and IRC ' 9815(b),
added by ACA ' 1563(f).
11
Proposed 45 C.F.R. ' 155.725(b).
12
See Christine Eibner, et al., Employer Self-Insurance Decisions and the Implications of the Patient
Protection and Affordable Care Act as Modified by the Health Care and Education Reconciliation Act of
2010 (ACA), 17-18 (2011), available at
http://aspe.hhs.gov/health/reports/2011/LGHPstudy/EmployerSIDACA.pdf. Health plans with fewer than
100 members need not file Form 5500, the annual ERISA plan reporting form, which identifies whether
plans are fully-insured or self-insured. See Michael J. Brien and Constantijn W.A. Panis, Self-Insured
Benefit Plans, 11 (2011), available at
http://www.dol.gov/ebsa/pdf/ACASelfFundedHealthPlansReport032811.pdf
13
See CCIIO, Self-Insured Employers: Approved Applications for Waiver of the Annual Limit
Requirements, June 15, 2011, available at http://cciio.cms.gov/resources/files/employer_07152011.pdf
14
See Eibner, et al., supra note 10.
http://aspe.hhs.gov/health/reports/2011/LGHPstudy/EmployerSIDACA.pdf
15
See Eibner, et al., supra note 10 at 84.
16
Eibner, et al, supra note 10, at 90
17
Eibner, at al, supra note 10, at 71-97.
18
Eibner, et al, supra note 10, at 13-14.
19
Eibner, et al, supra note 10, at 84.
20
Bill Gray Enterprises v. Gourley, 248 F.3d 206 (3rd Cir. 2001); United Food & Commercial Workers v.
Pacyga, 801802 F.2d 1157 (9th Cir. 1986); Thompson v. Talquin Building Products, 928 F.2d 649 (4 th Cir.
1991).
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5. 21
American Medical Security Inc., v. Bartlett, 111 F.3d 358 (4 th Cir. 1997). A Missouri court also struck
down a state attempt to regulate stop loss insurance, but a Kansas court upheld its states regulation. And
Patricia Butler, ERISA Preemption Manual for State Health Policy Makers (NASHP 2010), 64-65,
available at http://www.nashp.org/sites/default/files/ERISA_Manual.pdf.
22
Edstrom Industries v. Companion Life Ins. 516 F3d. 546 (7th Cir. 2008); General Motors v. Calif. State
Board of Equalization, 815 F.2d 1305 (9 th Cir. 1987.)
23
26 U.S.C. ' 105(h)(6).
24
26 C.F.R. ' 1.105-11(b).
25
See McDaniel v. North American Indemnity, 2008 WL 1336832 (S.D. Ind. 2008).
26
DOL Advisory opinion 2003-03A.
27
Del. Code. Ann. Tit. 18, ' 7218(e) (groups with no more than 15 members)
28
N.Y. Ins. L. '' 3231(h), 4317(e). New York also prohibits insurers as serving as third party
administrators for self insured plans, as does North Carolina. N.C. Gen. Stat. 58-50-130(a)(5). North
Carolina also bans stop loss insurance for small groups that do not comply with its small group reforms.
29
Or. Rev. Stat. 742.065(3).
5