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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Roger Baron 11/17/2008 01:47 PM
The amicus briefing in Sereboff indicated that "reimbursement" amounts to $ 1 Billion annually in the U.S. The vast majority of these reimbursement recoveries flow back to insurers on the risk. In this way, the insurance industry is able to avoid state law which would otherwise prohibit or ameliorate the harshness of subrogation. It is a sad state of affairs where such a huge portion of subro recoveries (reimbursement) flows to the pockets of the insurers on the risk and not to the plan members. It is my belief that all insurers on any portion of the risk - including all stop gap insurers -- are governed by state law in regard to the issue of reimbursement. This is required by 1) the McCarran Ferguson Act; 2) ERISA's Saving Clause; and 3) the holding of the U.S. Supreme Court in FMC v. Holliday. I recognize that there are a few federal court opinions which have bought into the industry argument that a "self-funded plan doesn't lose its status as a self-funded plan just because it has insurance." This argument is perversion of the system we have established through the McCarran Feguson Act and the Savings Clause of ERISA. And it is this sort of thing (commercial insurers worming their way into federal preemption by hiding behind a self-funded plan connection) that has led to the devastating effects of reimbursement we see in so many cases such as the Wal-Mart v. Shank case. When I last checked a form 5500 for Wal-Mart's plan, I found in excess of 40 commercial insurers providing coverage and many of these were health insurers. Lawyers should never accept the proposition that Wal-Mart is a true self-funded plan.
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Don Levit 11/17/2008 01:47 PM
Brian: I am curious how states regulate stop-loss insurers. For example, let's say we have a commercial insurer which fully insures plans, and self-insures plans. Are there distinct regulations for each function? Are there guarantee laws if a stop-loss insurer goes bankrupt, or is the employer on the hook? Roger: I like how you distinguish commercial insurers. This is generally defined as making plans available to the public. While an employer is not selling to the public, it is operating as an insurer in stop-loss situations. As an insurer, it should be regulated by the state. It makes no sense that as a single employer, the employer is not subject to state regulation, but would be if 2 employers had a stop-loss policy. ERISA does not make this distinction between self-funded and fully insured plans. The Supreme Court did, I believe, in Metropolitan v. MA. This distinction was a bit of a stretch, in my opinion. The distinction should not be between fully insured and self-insured plans. Rather, the distinction should be between commercial and non commercial insurers, both of which should be subject to state regulation, in my opinion. Don Levit
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Travis Mayor 11/17/2008 01:47 PM
What about a scenario where a health plan is self-insured up to about $150,000 and then stop loss/excess insurance kicks in. However, the plan is for employees of various hospitals and medical facilities. One of the facilities under the plan is insured by Kaiser Permanente. Listed on the form 5500 are the stop loss carriers and the kaiser insurance. Is there any case in any circuit which supports that this is not a self-insured or self-funded plan?
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