When Congress passed the Patient Protection and Affordable Care Act of 2010 (“PPACA”), a number of groups raised red flags that small employers would attempt to circumnavigate the law by purchasing stop loss insurance policies with low attachment points, essentially transferring most, if not all, of these employers’ health benefits risks to insurers while retaining the benefits of being a self-funded employee benefit plan.
This article provides an overview of stop loss insurance, the potential issues associated with stop loss insurance coverage as a result of the passage of PPACA, and the current and likely future state of regulation of small employer stop loss insurance, including certain “desk drawer” interpretations of the law.
Stop Loss Insurance Primer
Traditionally, within the health care arena, stop loss insurance insures an employer or its group health plan against extreme losses. Under a stop loss insurance policy, the insurance company becomes liable to the employer for losses that exceed certain, specified limits. These limits (or “attachment points”) can be based on an individual level (“specific stop loss”) or a benefit plan as a whole (“aggregate stop loss”), over the term of the policy, which is usually an annual period. Upon reaching the attachment point, the insurer must pay the employer for all covered claims expenses beyond the set dollar amount.[i]
One of the key differences between stop loss and traditional health insurance is that the benefits under the stop loss insurance policy are paid to the employer and/or its benefit plan to indemnify them for their health care claim expenses and not to the actual employee receiving the benefits. As such, neither federal nor state governments currently regulate stop loss insurance as health insurance.[ii] In fact, stop loss insurance is often issued by property and casualty underwriters.
PPACA and Stop Loss Insurance
Generally, self-funded employee welfare benefit plans that are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) are exempt from a number of PPACA’s more onerous requirements, including: coverage of minimum essential benefits, compliance with the minimum medical loss ratio requirements and participation in certain aspects of PPACA’s risk-adjustment system.[iii]
In turn, under section 514 of ERISA, states are generally preempted from regulating employee welfare benefit plans, including the regulation of such plans as insurance.[iv] However, ERISA section 514(b)(2)(A) saves state insurance laws from such preemption.[v] As a result, insurance policies issued to those plans or plan sponsors – arguably including stop loss insurance policies – can be regulated by states if their regulation is directed toward and affects the business of insurance rather than the relationship between an employee benefit plan and its participants.[vi]
Because self-funded plans are exempt from significant aspects of both federal and state insurance laws, regulators and certain consumer advocate groups have expressed concerns that small employers that purchase stop loss insurance with low attachment points will continue to receive the benefits of self-funding without keeping any significant amount of risk.[vii] The concern with such a practice, other than the self-funded plan providing fewer benefits to its enrollees, is that if predominantly small employers with healthier employees follow this practice, it could worsen the remaining small group risk pool and increase premiums in the fully insured small group market, including the Small Business Health Options Program (“SHOP”) Exchanges that begin in 2014 under PPACA.[viii]
Current and Future Regulation of Small Employer Stop Loss Insurance
- Federal Request for Information
The fear that small employers would likely attempt to “opt-out” of the SHOP Exchanges did not go entirely unnoticed by federal regulators. On May 1, 2012, the Internal Revenue Service, the Employee Benefits Security Administration, and Centers for Medicare & Medicaid Services issued a request for information regarding the use of stop loss insurance, with a focus on the prevalence and consequences of stop loss insurance at low attachment points, or the point at which excess insurance or reinsurance limits apply.[ix]
Although there has not been any subsequent action to date from these agencies, many in the stop loss insurance industry viewed this request as a first step towards the further federal regulation of stop loss insurance policies.[x] Despite, or perhaps even because of, the lack of federal action, states have increasingly attempted to tackle the issue themselves, within the narrow window allowed by ERISA, as discussed above.
- NAIC Model, Recent Attempted and Failed Change to NAIC Model
Back in 1995, the National Association of Insurance Commissioners (“NAIC”) had previously developed the Stop Loss Insurance Model Act (“Model Act”), the latest version of which was approved by the NAIC in 2002.[xi] As currently existing, for groups of 50 or fewer members, the Model Act provides that aggregate stop loss insurance may not be less that the greater of: (1) $4,000 multiplied by the number of group members, (2) 120 percent of total expected claims during the policy’s period, or (3) $20,000 indexed for inflation. In turn, specific stop loss insurance was limited to an attachment point of no lower than $20,000. See Stop Loss Insurance Model Act, Section 3(A)(1)(a) and (b).[xii]
Shortly after the passage of PPACA, the NAIC’s ERISA Working Group proposed raising the minimum thresholds for small groups. Specifically, the proposed revisions to the Model Act would have increased the specific attachment point to $60,000, and the aggregate attachment point to lesser of $15,000 times the number of enrollees in the plan, or 130 percent of total expected claims.[xiii] According to one analysis, the proposal would have roughly halved the amount of risk that a small employer could insure under the standards established in 1995.[xiv]
However, after intense debate leading up to the 2012 Fall National meeting, the NAIC’s ERISA Working Group ultimately chose not to adopt the stricter small employer stop loss proposals.[xv]
- State Specific Activity Post-PPACA
Prior to the passage of PPACA in 2010, only Minnesota, New Hampshire and Vermont had adopted the Model Act in its entirety[xvi], while 15 other states had adopted legislation, regulations or issued bulletins impacting the use of stop loss insurance.[xvii] In addition, it has been the authors’ experience that West Virginia, Idaho, Texas and Wisconsin all have “desk drawer” rules related to the approval of stop loss policy forms. Such unwritten desk-drawer rules often require that the relevant attachment points be consistent with the Model Act in order for the state to approve the use of the stop loss insurance policy form.
Since the passage of PPACA, California,[xviii] Colorado,[xix] Delaware,[xx] New Jersey,[xxi] Rhode Island,[xxii] and Utah[xxiii] have all passed statutes, adopted regulations or issued insurance bulletins further regulating the issuance of stop loss insurance to small employers. A similar bill was also introduced in Minnesota in 2013, but failed to pass.[xxiv]
In California, Colorado, Rhode Island and Utah, the new statutes generally place limits on small employer stop loss insurance policy attachment points (both specific and aggregate) largely consistent with the 1995 version of the Model Act (with some variation). [xxv] In addition, Colorado and California’s laws also prohibit the practice of “lasering” (i.e., the practice a setting high specific deductibles on plan members with pre-existing health conditions).[xxvi]
In contrast to the above approach, Delaware instead simply prohibits the issuance of any stop loss insurance policy to a small employer with less than 15 employees regardless of attachment point level, lasering or any other policy feature.[xxvii]
Finally, in New Jersey, the Department of Banking and Insurance, Office of the Commissioner, has issued an insurance bulletin stating that the Commissioner views the selective marketing of coverage to small employers on the basis of the health history of that employer’s employees and the denying of coverage to employers based on employee health status to be an unfair trade practice.[xxviii] The Bulletin also puts small employer stop loss insurers on notice that the Commissioner intends to promulgate regulations in the near future to prohibit the consideration of health status in the offering or pricing of stop loss insurance.
As shown above, after a dormant decade in which stop loss insurance received little attention from both regulators and the general public, because of PPACA this unique insurance product is once again at the forefront. With no less than the Wall Street Journal writing a 900 word opinion on the impact of such legislation, it is clear that this is just the beginning of a heated battle between those favoring greater regulation of the stop loss insurance market and those favoring a more free market approach.[xxix] It is likely that more states will aggressively pursue greater regulatory authority over this area, and consequently, interested parties, from self-insured small businesses to trade associations to underwriters themselves, may seek to challenge these new laws in court in the same manner they did when the first stop loss insurance regulations were passed over 15 years ago.
[i] See by way of example, NAIC Stop Loss Insurance Model Act (Model 92).
[ii] See SIAA Notice, SIAA Meets with Treasury/IRS Officials on Stop-Loss Issue (http://www.siia.org/i4a/pages/index.cfm?pageid=5676).
[iii] For example, self-funded plans are not subject to PPACA’s: Essential Health Benefits Requirement (PPACA § 1302), Annual Limits on Deductibles PPACA § 1302(c)(2), or Guaranteed Issue of Coverage Requirement (PPACA 2702).
[iv] 29 USC § 1144.
[v] 29 USC § 1144(b)(2)(A).
[vi] The authors recognize that under American Medical Security, Inc. et al. v. Bartlett, 111 F.3d 358, (4th Cir. 1997)a court found that a Maryland statute that deemed stop loss insurance with a low attachment point to be health insurance and therefore subject the mandated health benefits prescribed by state law to be preempted by ERISA therefore void. However, Maryland has subsequently revised its statute.
[vii] See e.g. New York Times, “Some Employers Could Opt Out of Insurance Market, Raising Others’ Costs” February 17, 2013 (http://www.nytimes.com/2013/02/18/us/allure-of-self-insurance-draws-concern-over-costs.html?_r=0); and also Community Catalyst, “A Potential Threat to the Affordable Care Act: Stop Loss Insurance” (http://familiesusa2.org/assets/pdfs/toolkit/CC-Stop-Loss.pdf).
[ix] See Request for Information Regarding Stop Loss Insurance, 77 Fed. Reg. 25,788-25,790 (May 1, 2012).
[x] See U.S. Chambers of Commerce, Response to Request for Information Regarding Stop Loss Coverage, July 2, 2012 (http://www.dol.gov/ebsa/pdf/StopLoss0105.pdf); and also Self-Insurance Institute of America, Inc., Response to Request for Information – Stop-Loss Insurance (CMS-9967-NC), June 21, 2012 (http://www.dol.gov/ebsa/pdf/StopLoss0075.pdf).
[xi] See NAIC Stop Loss Insurance Model Act (Model 92).
[xiii]See GUIDELINE REVISIONS TO STOP LOSS INSURANCE MODEL ACT (http://familiesusa2.org/assets/pdfs/Stop-Loss-Model-Act.pdf)
[xiv] See Self-Insurance and Stop Loss for Small Employers, Deborah Chollet, Ph.D., Mathematica Policy Research (http://www.naic.org/documents/committees_b_erisa_120626_chollet_self_insurance.pdf).
[xv] See 2012 NAIC Fall National Meeting ERISA (B) WORKING GROUP, November 29, 2012, Meeting Summary Report (http://www.naic.org/meetings1211/committees_b_erisa_2012_fall_nm_summary.pdf?135421625964).
[xvi] See Minn. Stat. §§ 60A.235 et seq., N.H. Rev. Stat. Ann. §§ 415-H:1 et seq.; and Vt. Code R. H-09-2 §§ 1 et seq.
[xvii] According to the NAIC those states are: Alaska, Arkansas, Colorado, Iowa, Kansas, Louisiana, Maryland, Nevada, New Jersey, New York, Oklahoma, Oregon, Pennsylvania, Tennessee and Washington. South Dakota has also passed a law explicitly prohibit the regulation of stop loss insurance. See S.D. Codified Laws § 58-18B-35.
[xviii] Cal. Ins. Code 10752.1 et seq.
[xix] Colo. Rev. Stat. §§ 10-16-119 and 10-16-119.5.
[xx] Del. Code Ann. tit. 18, s. 7218(e).
[xxi] New Jersey Department of Banking and Insurance, Office of the Commissioner, Bulletin 2011-20 - October 3, 2011, “Selective marking of stop loss coverage.”
[xxii] R.I. Gen. Laws Ann. §§ 27-8.2-1 et seq.
[xxiii] Utah Code Ann. §§ 31A-43-101 et seq.
[xxiv] Minnesota H.B. 647-2013.
[xxv] Ibid. xviii, xix, xxi and xxii.
[xxvi] Ibid. xviii and xix.
[xxvii] Ibid. xx.
[xxviii] Ibid. xxi.
[xxix] See The Wall Street Journal, “The Attack on Self-Insurance: Liberals want to rewrite ERISA to save ObamaCare.” September 12, 2013 (http://online.wsj.com/news/articles/SB10001424127887324886704579053042138004388).