Benefits and Compensation

Texas Excludes Self-funded Plans From ‘Insurer’ Definition, Exposing S-L Policies to State Taxes

In a May 18 ruling, the Texas Supreme Court compelled a stop-loss insurer to pay a direct premium tax on stop-loss policies sold to self-funded health plans.

Stop-loss insurance written in Texas for self-funded plans is not “reinsurance” and thus must pay state levies and follow state insurance rules, the court held.

American National, a stop-loss insurer, had been fighting to avoid paying premium taxes for stop-loss coverage it wrote in 2001, 2002 and 2003, because it said the policies were reinsurance and not subject to the direct tax. But the insurer’s arguments would fail.

Instead, the court upheld the Texas Department of Insurance’s position that “reinsurance” can be defined as such only if the policyholder is another insurance company. Since TDI’s position that self-funded plans are not insurers was reasonable, American National would have to pay back taxes, the court held.

The court would support the department’s position in TDI v. American National Ins. Co., 2012 WL 1759457 (55 Tex. Sup. Ct. 705, May 18, 2012).

Conclusions in TDI v. American National Ins. Co.

1)    A true reinsurer was defined as providing coverage to other insurance companies.

2)    S-L to a self-funded health plan is not reinsurance but instead, it’s direct insurance to be regulated by the state insurance Code.

3)    The agency charged with a statute’s enforcement should get special consideration as long as its interpretation is reasonable and doesn’t contradict the statute’s plain language. Courts should defer to a regulatory agency’s interpretation as long as it’s not plainly erroneous, particularly when (1) the interpretation is formally adopted; (2) the statute was unclear to start with; (3) the agency’s view is reasonable.

Inconsistent Code Opens Door for Regulator

Direct health insurance is subject to state laws and levies, while reinsurance is exempt from those burdens. But the insurance code lacked consistent definitions.

In the absence of clear, consistent definitions for “reinsurance” and “stop-loss,” and for the question of whether “insurers” include self-funded plans, the state high court deferred to TDI’s constructions because it is the regulating agency that interprets the statute.

TDI maintained American National was not selling reinsurance to self-insured plans, and as a result, American National owed taxes on policies. TDI’s refusal to consider self-funded plans as insurers was reasonable in the court’s eyes, even though self-insured plans act like insurers in some ways, the court said.

The high court reversed an earlier Austin Court of Appeals opinion (2010 WL 1633170), which would have allowed stop-loss insurers to sell reinsurance to self-funded plans.

State Pursues Tax Revenue

The state claimed that American had not paid taxes or complied with state rules for insurers for several years. It said the payer improperly entered premiums it collected from self-insured plans as “assumed reinsurance” and not as “direct written premium.” As a result, American National failed to contribute to the state’s health insurance risk pool.

American sued to reverse TDI’s actions and enjoin their enforcement. It argued that self-funded plans are “insurers” and “in the business of insurance,” and if reinsurance is the transfer of risk from one insurer to another, then self-funding meets that test.

Appeals Court’s Key Definition Jettisoned

The high court rejected the definitions of “insurer” and “business of insurance” (at Code Chapter 101) that the appeals court relied on. The expansive view in Code Chapter 101 was an attempt to spread a wide net when describing TDI’s mission to rein in unauthorized insurance activity by all entities.

[U]nlike the court of appeals, we do not find Chapter 101’s definitions to be determinative in this case, and we must look elsewhere for guidance.

The appeals court could have used the more restrictive definition of “insurer” found in the code’s licensing rules, it said.

Self-funded Plans are Not Insurers

Reinsurance was limited to the redistribution of risk between sophisticated insurers, which self-funded plans are not, because the state code does not regulate them as such, TDI argued. Because stop-loss policies for health plans are designed to cover claims ultimately spent on hospital and medical expenses, they met the definition of health insurance, it continued.

In 1999, TDI put forth a regulation that explicitly subjected stop-loss policies to self-insured health plans to regulation and levies, the court noted. It was based on longstanding agency policy, and a rule that had been officially announced and through a public comment period.

The court agreed with TDI, and said a ruling raised by American National, Brown v. Granitelli, 897 F.2nd 1351, 1354 (5th Cir., 1990), did not stop Texas from regulating stop-loss insurers.

State Uses Deemer Clause to Advantage

ERISA’s saving clause stipulates that insurance laws that do not mandate ERISA plan terms are not preempted. ERISA’s deemer clause creates an exception to the savings clause, by prohibiting states from regulating self-funded ERISA plans as if they were insurers.

Thus, under the savings clause, the state retains its right to regulate stop-loss insurers. Under the deemer clause, self-insured plans may not be seen as insurers, the high court said.

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