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  • 1. THE AFFORDABLE CARE ACT AND STOP-LOSS INSURANCE STATEMENT TO THE NAIC ERISA (B) SUBGROUP TIMOTHY STOLTZFUS JOST, NAIC FUNDED CONSUMER REPRESENTATIVEERISA’s regulatory exemption for self-insured (self-funded) plans is a persistent thorn inthe side of state insurance regulators. ERISA preempts state law relating to employeebenefit 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 stateregulation.1 This may be acceptable for large employer groups, which have thebargaining power and expertise to protect their employees. But when small employerpackages purchase “self-insured” packages from insurers, including stop-loss coveragewith very low attachment points and administrative services, they are essentiallypurchasing conventional health insurance, except that it is free from state regulation.Insurers have always had an incentive to market “self insurance” to healthy groups, andsmall businesses with healthy enrollees have always had an incentive to purchase it. TheAffordable Care Act (ACA), however, increases these incentives dramatically in twoways. Insurers understand this, and are very actively marketing “self-insured” productsto small groups.2First, self-insured plans are subject to fewer regulatory requirements under the ACA.3The Affordable Care Act applies to individual and employer coverage. There are fourcategories of employers under the ACA—small employers, large employers,grandfathered employers, and self-insured employers. There are potentially fiveemployer insurance markets—the exchange market, the small group market outside theexchange, the large group market outside the exchange, the grandfathered market, and theself-insured market. (There will also be an individual insurance market in and out of theexchange).The small employer markets inside and outside of the exchange are subject to many ofthe same regulatory requirements. Whether in or out of the exchange, small group plansmust offer the essential benefits package,4 include their members in a single risk pool,5participate in the risk adjustment program, 6 offer the same premiums without regard tohealth status,7 and offer the precious metal tiers.8 But self-insured plans are not subject tothese requirements.9 They are also exempt from the minimum medical loss ratiorequirements, although self-insured do not technically have loss ratios since they are notinsured.10 Self-insured plans are also exempt from a fee imposed on insurers under ACAsection 9010 and stop loss plans do not need to justify unreasonable rate increases. Smallgroup plans, therefore, face a significant incentive to achieve self-insured status to avoidsome 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 ofself-insuring is dramatically decreased. An employer can purchase stop loss coveragefrom 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 ofdramatically increased stop-loss rates and lack of affordable access to conventionalinsurance if the group’s risk profile deteriorates (e.g. an employee or dependent getscancer or needs an organ transplant). But, beginning in 2014, insurers (in or out of theexchange) will not be able to refuse to insure such a group or exclude preexistingconditions, and will have to insure at standard rates. Under proposed regulations, SHOP(small employer) exchanges cannot have open enrollment periods for employers but mustadmit small employers whenever they apply for coverage.11 The threat of adverseselection 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 prohibitionunder federal law against small group plans self-insuring. Indeed, it is estimated that 7.9percent of employers with 3 to 49 employees and 20.3 percent of employers with 50 to199 employees offer at least one self-insured plan.12 Of the 474 self-insured groupsapproved by HHS for “mini-med” waivers by July 15, 2011, 109 had fewer than 50enrollees and 47 had fewer than 25 enrollees.13The most extensive attempt to date to model the effect of self-insurance on the ACAreforms was done by the Rand Corporation in the Spring of 2011.14 This study concludedthat if stop-loss coverage is available with attachment points as low as $20,000, 33percent of employers with fewer than 100 employees would self-insure.15 Rand estimatedthat banning self-insurance in the small group market would lower premiums for theplatinum plan in the exchange (which Rand believes will be the most commonly offeredESI policy) by 3.3 percent.16 The study authors acknowledge, however, that it is verydifficult to accurately project employer responses to the ACA and the effect that thesewill have on the exchanges until more is known about the 2014 regulatory and insuranceenvironment, and they did not model the effect of stop-loss insurance with attachmentpoints 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 ofgenerous stop-loss coverage. If employers had to actually bear significant risk inbecoming self-insured, small employers would be less likely to pursue it.18 But stop-losscoverage with low “attachment points,” i.e. amounts beyond which the employer is not atrisk for the costs of any employee, can dramatically lower the risk of “self-insurance” foremployers. As the Rand Study acknowledges, this can draw a considerable number ofsmall employers away from the exchange--in all likelihood those who present the lowestrisks.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 theirself-insured status simply because the plans have stop-loss coverage. 20 Moreover, afederal court in Maryland has held that states may not attempt to regulate the coverage ofself-insured plans by regulating stop-loss coverage.21 On the other hand, stop-losscoverage is insurance, and states may regulate stop-loss coverage just as the do any otherform of insurance as long as they do not try to impose requirements on self-insured plansby so doing.22 2
  • 3. Although the ACA uses the term “self-insured” in a number of provisions, nowhere doesit define it. The term is also neither defined in the Public Health Services Act nor inERISA. The term “self-insured medical reimbursement plan" is defined in the InternalRevenue Code (which prohibits self-insured plans from discriminating in favor of highlycompensated employees) to mean “a plan of an employer to reimburse employees for[medical] expenses . . . for which reimbursement is not provided under a policy ofaccident and health insurance.”23 Federal regulations implementing this provision clarifythat a plan is not self-insured simply because it is experience-rated, but that an employerdoes not lose self-insured status simply because it is administered by an insurer if risk isnot transferred to the insurer.24Both the Labor Department and the courts have recognized that stop-loss coverage withvery low attachment points can make self-insured status a sham, although the limits arefar from clear.25 Insurers are selling “self-insured plans” to employee groups with as fewas 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 effectivedate of the, essential benefits coverage requirement -- and small group plans seek toevade this requirement. But states may regulate, or even prohibit, stop-loss insurancewhether or not it is a sham, as long as they do not try to direct the terms of self-insuredplans (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. TheDOL concluded in advisory opinion 2003-03A that an insurance company that purportedto offer 100 percent reinsurance coverage to “self-insured” ERISA plans was in fact aninsurance company insuring an insured plan, and was subject to state regulation.26 TheDOL and Treasury should go further and define self-insured plan so as only to permitemployers to self insure if they can legitimately bear a substantial share of the risk of anemployee health benefits plan.This issue can—and should—also be addressed by the states. The most straightforwardapproach 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 tosmall 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 arehigh 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 ofstop-loss insurance to small groups. Failing this, the NAIC should update its modellaw to for the inflation that has occurred since the amounts in the model law wereestablished in 1995. The most realistic measure of inflation would be the increasethat 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 increasein 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 groupmembers, 120 percent of expected claims, or $40,000. The model law could beamended to offer states both alternatives.States should then adopt the amended model law to require stop-loss insurance to infact be legitimate stop-loss insurance, not comprehensive insurance masqueradingas 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 NAICshould alert states to the growing threat to state health insurance regulation posedby self-insurance, and urge states to adopt the NAIC Model Act. This is clearly anissue 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 GroupMarket, (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 athttp://www.commonwealthfund.org/~/media/Files/Publications/Fund%20Report/2010/Sep/1444_Jost_hlt_ins_exchanges_ACA_eight_difficult_issues_v2.pdf4 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 PatientProtection and Affordable Care Act as Modified by the Health Care and Education Reconciliation Act of2010 (ACA), 17-18 (2011), available athttp://aspe.hhs.gov/health/reports/2011/LGHPstudy/EmployerSIDACA.pdf. Health plans with fewer than100 members need not file Form 5500, the annual ERISA plan reporting form, which identifies whetherplans are fully-insured or self-insured. See Michael J. Brien and Constantijn W.A. Panis, Self-InsuredBenefit Plans, 11 (2011), available athttp://www.dol.gov/ebsa/pdf/ACASelfFundedHealthPlansReport032811.pdf13 See CCIIO, Self-Insured Employers: Approved Applications for Waiver of the Annual LimitRequirements, June 15, 2011, available at http://cciio.cms.gov/resources/files/employer_07152011.pdf14 See Eibner, et al., supra note 10.http://aspe.hhs.gov/health/reports/2011/LGHPstudy/EmployerSIDACA.pdf15 See Eibner, et al., supra note 10 at 84.16 Eibner, et al, supra note 10, at 9017 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). 4
  • 5. 21 American Medical Security Inc., v. Bartlett, 111 F.3d 358 (4 th Cir. 1997). A Missouri court also struckdown a state attempt to regulate stop loss insurance, but a Kansas court upheld its states regulation. AndPatricia 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. StateBoard 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 partyadministrators for self insured plans, as does North Carolina. N.C. Gen. Stat. 58-50-130(a)(5). NorthCarolina 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