Backdoor Regulation of Self-Funding – Stop-Loss and the Affordable Care Act

By guest author Ron E. Peck, Esq.

When the Patient Protection and Affordable Care Act (“PPACA”), (now commonly referred to as the  Affordable Care Act, the ACA, or “Obamacare”) was signed into law by President Barack Obama on March 23, 2010, both the health benefits and health care industries were abuzz with rumor, conjecture, and fear.  As the dust has settled, we who service these industries have begun to appreciate the real impact the law has had on both the provision of health care, as well as payment for that care.

One industry that had to look more deeply at the “ripples” created by the law’s passage, to appreciate the impact the ACA would have on them, was the stop-loss, reinsurance, and/or excess loss carriers.  While health insurance carriers, self-funded health plans, third party administrators, and other payers were able to understand their role and how the law would influence their future, stop-loss is not health care.  Stop-loss does not pay medical service providers for health care.  Stop-loss does not insure individual patients.  Stop-loss is financial insurance; not health insurance.

Look at it this way…  Imagine a law was passed, seriously impacting auto insurance.  Car owners and auto insurance carriers, as well as mechanics, would understand immediately how this will impact them.  But it would take some time for the carriers offering property insurance to those mechanics (insuring their garages) to see how the trickle down impact of such a law would impact them.

So while the knee jerk reaction to the ACA was to think that its impact on stop-loss would be minimal, the truth has revealed itself to be quite the opposite.

Right off the bat, stop-loss insurance carriers came to appreciate that if the health plans they in turn insure are forced by the law to pay more (expand coverage, eliminate pre-existing condition exclusions, remove annual and lifetime caps, obey the findings of independent review organizations [“IRO”], etc.), then so too would the stop-loss carrier be “expected” to pay more.  I say “expected” because while the law requires – for instance – a health plan to obey an IRO’s finding in response to an appeal, the law does not require the stop-loss carrier to obey the same IRO decision.  Furthermore, if by the time the appeal runs its course and the IRO deems the claim to be payable, the stop-loss coverage period has already expired, this would be another reason stop-loss could deny the claim.  Yet, most carriers agreed that if an external force – such as Federal law – forces the health plan to pay a claim, the carrier – likewise – would deem the claim payable.

The impact of the ACA on stop-loss has expanded beyond increased payment and coverage responsibilities.  Those who support the ACA, the insurance exchange marketplace(s) created by the law, and the ultimate mission of the law, have stated that “adverse selection” (health lives not seeking insurance in exchanges – a necessary element to enhance the risk pool) created by self-funding is one of the – if not the – greatest threat to the ACA and its exchanges.

Not too long after the issue of “adverse selection” was identified, those who support the ACA and exchanges sprung into action; seeking to turn the tide, prevent this influx of self-funding, and get those healthy lives back into the exchange’s risk pool.  Unfortunately for them, state based legislators and insurance commissioners, represented by the National Association of Insurance Commissioners or “NAIC,” have little to no power over self-funded plans.  Why?  The Employee Retirement Income Security Act of 1974 (“ERISA”) controls the regulation of such plans, and mostly prohibits State based regulation of such self-funded programs.

How, then, could the NAIC and ACA supporters regulate self-funding without regulating self-funding?  Enter stop-loss!

Stop-loss, as I mentioned earlier, is financial insurance – not a self-funded health plan.  Unlike those self-funded plans, financial insurance is fair game for State regulation.  The NAIC in turn realized that if they could limit or eliminate self-funded plans’ ability to secure stop-loss, it would increase the cost and risk associated with self-funding to the point that many smaller employers wouldn’t be willing to self-fund any longer.  Thus, smaller employers are kept from self-funding, without the NAIC regulating self-funding in violation of ERISA.  Brilliant!  And so… stop-loss finds itself regulated not because stop-loss needs or called for regulation, but rather, because in so doing, self-funding is curbed.

Recently, the NAIC’s ERISA sub-group released their commentary regarding this “backdoor regulation” of self-funding via stop-loss regulation, in the form of a whitepaper.  The Third Party Administrators Association of America (“TPAAA”), which is a subdivision of The American Association of Payers, Administrators and Networks (“AAPAN”), has reviewed the offering and expressed some areas of concern.  It appears as if the NAIC is advancing a theory that self-funded plans are not financially viable, and a poorly timed catastrophic claim could also mean catastrophe for the employer and employees; (an issue resolved by the presence of stop-loss, which – conveniently – has been made tougher to secure by the NAIC).  Likewise, the Self-Insurance Institute of America, Inc. or “SIIA,” has also expressed its concerns, and is working toward clearing some misconceptions as it relates to self-funding.  Only if self-funding is seen as a valuable product by the NAIC, will stop-loss – in turn – avoid being the NAIC’s scapegoat, as they seek to eliminate self-funding in the interest of the ACA and exchange.

Ron E. Peck, Esq.
Sr. Vice President & General Counsel
The Phia Group, LLC
Phone: 781-535-5617
www.phiagroup.com