May 26, 2017
The St. Louis Post Dispatch carried an article three days ago discussing one real world effect of the difference between self-funded and insured ERISA plans that's worth taking a look at. You can find it here.
Very few employers are willing to completely self-fund their employee benefit plans. Unless you are a huge company, the risk of serious losses due to an above average number of catastrophic illnesses or injuries among a few employees is generally too high for employers to feel comfortable paying all the costs of a health benefits plan. Consequently, most employers who chose to "self-fund" their employee benefits rather than simply purchase a group health, disability or life insurance policy, will design their plan so as to have a cutoff point at which their obligation to fund any claims terminates. For claims above that "attachment point," employers usually purchase a policy of "stop loss" or "excess loss" insurance. It's sometimes also referred to as "reinsurance" although that is not technically a correct term since the initial employer risk isn't insured in the first place. Often the stop loss insurer also agrees to serve as the third party administrator and claims processor for all claims.
Tension often exists on the legal front for these hybrid plans. Employers and their TPAs and stop loss insurers assert that because the first bit of any given claim is self-funded, the entire plan falls under ERISA's "deemer" clause. The flip side of this preemption coin, so the argument goes, is that all claims arising under this type of hybrid plan fall outside the scope of ERISA's "savings" clause and states have no ability to regulate these plans as they would for fully insured ERISA plans.
I believe the ability of self-funded ERISA plans to circumvent state insurance laws will be tested more aggressively by claimants in the next few years. Employers will llikely continue to move from fully insured to stop loss insured, in part because they are being told by insurers that they can use ERISA preemption to get out from under state insurance laws. And for all claims that do not hit the attachment point and trigger coverage from a stop loss insurance policy, that's true. But for large claims that are denied, the risk of loss may be overwhelmingly on the stop loss insurer.
For example, if an employer has a stop loss attachment point of $5,000 for any given participant or beneficiary in a calendar year, and a participant in the plan is involved in a terrible auto accident with $250,000 in medical expenses, the amount of the claim that is self-funded is only the first $5,000 after which a group policy of stop loss health insurance takes over. Literally 2% of the claim comes from the self funded portion of the plan and 98% comes from an insurer that would, for all other purposes, be subject to state insurance regulation. So why should that participant be completely deprived of the protection state insurance laws provide him simply because the first 2% of the claim is self funded? The great majority of the claim, 98% of it, is being paid by a conventional insurer under a group insurance policy (albeit a stop loss policy). But in the non-ERISA context, it's very clear stop loss insurers are subject to state insurance law.
This is another example of how big business and big insurance try to tilt the playing field in their favor and against the interests of ERISA participants and beneficiaries.
H/T to Roger Baron for his promotion of this analysis as applied to hybrid plans
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