Benefits and Compensation

Experts See Trend Against Self-funding in State Stop-loss Restrictions

While ERISA self-insured plans themselves are not subject to state regulation, states are clamping down on stop-loss coverage as a way to discourage self-funding, say attorney Ron Peck and legal administrator Chris Aguiar at the Phia Group, Braintree, Mass. The Texas Supreme Court ruling in TDI v American National Ins. Co. and the passage by the California Senate of S.B. 1431 are examples of concerted efforts from state insurance commissioners and health reform proponents to indirectly regulate self-insured plans by clamping down on stop-loss insurance, they say. Self-funded plans are exempt from state insurance laws thanks to ERISA; but insurers that issue stop-loss policies can be regulated by states.

As those proponents see it, according to Peck, the new health system with the exchanges must take in as massive a risk pool as possible. A self-funding option could become more economical if premiums rose due to reform’s insurance mandates. But that would divert premium-paying customers away from the exchanges, Peck says. Efforts to discourage self-insuring have resulted, he says.

In TDI v American National, on May 18, the Texas Supreme Court ruled that stop-loss insurance policies issued to self-insuring health plans are “direct insurance” and as such can be regulated by Texas’s insurance department. The stop-loss insurer failed in its argument that self-funded health plans are “insurers” under the insurance code and that stop-loss insurance between insurance companies and self-funded plans should be treated as “reinsurance.”

The California stop-loss law, S.B. 1431 would set stop-loss attachment points at a minimum 120 percent of expected claims for employers with 50 or fewer employees (but the bill started out with more draconian rules that were dropped from the Senate version). S.B. 1431 is based in part on a model stop-loss bill developed by the National Association of Insurance Commissioners.

And the NAIC is considering updating that stop-loss model act to raise minimum specific attachment points to $60,000 and the minimum aggregate attachment point increased to 130 percent of expected claims, the Self-Insurance Institute of America reported on June 1.

And as if to rub salt in the wound, Timothy S. Jost, a professor at the Washington and Lee University School of Law, has fired another volley against self-insuring in which he repeats prejudices self-funding advocates have been fighting for years: that it’s somehow associated with plan misconduct. Jost alleges that because a few health reform’s coverage mandates do not apply to them that abusive self-funded plans will flourish; and that fly-by-night self-funded plans are poised to spring to life, only to collapse as soon as major health bills must be paid. Jost says this in his latest paper:

Moreover, by self-insuring, small employers can game the provisions of the ACA, self-insuring at a low cost as long as their employees are healthy, but, as soon as the health of their group deteriorates, switching into the exchanges (or the outside-the-exchange small group market), where all groups are charged the same rate regardless of health status—and where insurers cannot exclude pre-existing conditions. Thus “self-insurance” threatens to undermine the small group reforms of the ACA, presenting “a clear and present danger to the viability of the small-employer market.

Self-funding interests feel these fears are entirely baseless and are working on a response.