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By Ian Wasser

Professor Korobkin presents interesting ideas in his discussion of the re-insurance loopholes in ERISA.  A potential solution is direct state regulation of stop-loss insurers.  The problem, of course, is that the targeting of stop-loss insurers and the self-insured employers that use these schemes could be seen as a direct action by a state legislature to “overcome” ERISA.

The schemes that I am talking about are low attachment points for stop-loss insurance.  Under ERISA, the so-called deemer clause prevents a self-insured employer from being “deemed” an insurance provider.  Self-insured employers are essentially immune from being required to provide state-mandated minimum health care benefits to their employees.  The advantages to businesses are obvious–they can choose which benefits to give to their employees and at the same time reduce costs associated from those now displaced benefits.

Most self-insured employers use stop-loss insurance, or re-insurance, to cover claims that go beyond a certain threshold per employee.  But, here’s the catch: nothing controls the attachment point for re-insurance.  For instance, a self-insured employer could maintain this status under the deemer clause and attach re-insurance at an arbitrarily low point, for instance $100.  Thus, the claims would effectively be paid by a traditional insurance company and the benefits could be individually chosen by the employer.  With too low an attachment point for stop-loss insurance, a self-insured employer is effectively no longer self-insured.

States could attempt to directly regulate stop-loss insurers, although the legislative history would certainly need to steer-clear of any mention of ERISA.  The so-called savings clause in ERISA allows states to directly regulate insurance.  A state would need to cleverly draft a statute that only regulates stop-loss insurance companies (which would be “saved” from ERISA) but that does not, in any way, regulate self-insured employers (which can not be “deemed” to be insurers by a state under ERISA).   Additionally, the new state law, as applied, must only be used to regulate the stop-loss insurer and not the self-insured employer.  This is the tricky part: if there is any hint that a state is effectively regulating a self-insured employer, the state law could immediately be preempted by ERISA.

Is state regulation of stop-loss insurance attachment points really desirable? That is hard to say.  The drafters of ERISA certainly did not intend a self-insured employer to abuse the re-insurance process, simply to maintain their self-insured employer status and avoid giving their employees state-mandated minimum benefits.  But would regulation of stop-loss attachment cause more employees to lose their benefits altogether?  For instance, requiring a high attachment point for re-insurance might be a great disincentive for an employer to self-insure or even offer any health benefits at all.  At the same time, would we rather have a “lesser” package of benefits offered, as opposed to having no package of benefits offered at all?  Self-insured employers would also face other financial difficulties if attachment points were set high–they would risk insolvency.  Forcing a self-insured employer to maintain a large cash reserve with which to pay employee benefit claims could also disincentivise an employer from being self-insured.

Maybe the most equitable solution, to both the employer and the employee, is to set stop-loss attachment points to a reasonable level.  But what does reasonable mean? Can we continue to put a dollar value on the health of a person?


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