The Changing Regulatory Landscape for Stop Loss Insurance by Fred E. Karlinsky, Richard J. Fidei and Erin T. Siska EDITORIAL NOTE: Commentary Background offered by the authors does not Although stop loss insurance is not addressed in the Patient Protection and necessarily represent the views of SIIA. Affordable Care Act of 2010 (the “Affordable Care Act or “ACA”), the National Association of Insurance Commissioners (“NAIC”) recently reviewed proposed ecent developments at the action with regard to the regulation of stop loss insurance. The NAIC adopted federal and state levels of a Stop Loss Insurance Model Act (#92) (the “Model Act”) in 1995, which was government, taken together, amended in 1999 to clarify that the law applied only to insurers and did not impose portend changes in the obligations on employer benefit plans directly. In essence, the Model Act provides Rregulation of stop loss insurance, which could lead more and more small and certain minimum standards for stop loss insurance coverage. Specifically, it prohibits mid-size firms to self-insure than ever an insurer from issuing a stop loss insurance policy that has an annual attachment before. Although neither state nor point for claims incurred per individual which is lower than $20,000; has an annual federal officials keep comprehensive aggregate attachment point (for groups of fifty or fewer) that is lower than the statistics on self-insurance, it appears to greater of: be growing in popularity as a feasible 1. $4,000 times the number of group members option. A recent study by the Employee 2. 120 percent of expected claims or Benefits Research institute indicates that nearly 60% of private sector 3. $20,000; workers were in self-insured health has an annual aggregate attachment point for groups of fifty or more that is lower plans in 2011, up from approximately than 120 percent of expected claims; or provides direct coverage of health care 40% in 1998 and 1999. expenses for an individual. These minimum standards ensure that the plan sponsor 42 June 2013 | The Self-Insurer © Self-Insurers’ Publishing Corp. All rights reserved. retains some of the risk in providing plans from state regulation, the Developments at the health benefits to its employees, rather Affordable Care Act does not define State Level than transferring all or most of the risk what a self-insured plan is. Absent a In July 2012, the NAIC’s ERISA (B) to a stop loss insurer. definition, there is no clear legislative Working Group circulated a set of draft The Model Act was only adopted in guidance in ACA as to what a self- guideline amendments to the Model its entirety by three states (Minnesota, insured plan is. More clear, however, is Act, as amended, which would have New Hampshire, and Vermont). Other which parts of ACA do not apply to essentially tripled the recommended states have adopted certain parts of self-insured plans. stop loss insurance attachment the Model Law only, or have chosen to First and foremost, self-insured minimums adopted in 1995. The new regulate stop loss insurance through plans are not subject to ACA’s essential standards had been developed by the other ways. For example, New York benefit requirement, otherwise known NAIC’s Health Actuarial Task Force and and Oregon have banned stop-loss as the “employer mandate,” which were intended to update the 1995 insurance for any firms with fewer than requires employers to provide certain standards to reflect today’s fifty workers. Many other states have essential health insurance coverages economic realities. standards similar to those in the to their employees. These essential Those speaking in favor of the Model Act, but allow attachment points benefits include health services such updated standards at the NAIC’s below $20,000. as maternity, mental health, and Fall 2012 meeting argued that they So much time has passed since prescription drug benefits. would maintain a level playing field and 1995 that the intended effect of the In addition, self-insured plans are establish reasonable expectations on standards in the original Model Act not subject to ACA’s risk adjustment or stop loss insurance attachment points. has been minimized in today’s medical risk pooling requirements. Accordingly, They also said the updated standards care environment. The obsolescence a self-insured plan can price its small would be important because they of the 1995 NAIC standards means, provide an alternative path for state- group coverage to reflect the group’s as a practical matter, that self-insured based regulation of health insurance, claims history or medical status or by plans bear less relative risk, even in the most of which is preempted by age, gender, or other factors. In contrast, few states where the Model Act was ERISA. They asserted that if stop loss fully-insured plans, under ACA, can adopted. Accordingly, today, self-insured attachment points are unregulated, a only vary premiums by the average age products with stop loss insurance high percentage of small groups are of the employees, the presence of a or reinsurance that are marketed to likely to self-insure, which would raise wellness program, and tobacco use. small firms closely resemble high- premiums noticeably in the small group Additionally, self-insured plans are deductible fully-insured plans, but are market. On the other hand, if the not required to pay the annual fee that not subject to many state insurance recommended higher attachment points regulations applicable to fully-insured insurers are required to pay on fully- were to be adopted, that risk disappears. plans pursuant to the federal Employee insured products pursuant to Section Opponents argued that the Model Retirement Income Security Act of 1343 of ACA. However, self-insured Law is largely irrelevant since it has 1974 (“erISA”). ERISA states that plans are required to contribute to the been adopted in so few states. They multistate employers that offer a self- transitional reinsurance program from also opposed the updated standards on insured plan are not required to cover 2014 through 2016 created by Section the basis that they would close doors health care services for state-mandated 1341 of ACA, and confirmed in Final to options for small employers who benefits, as fully-insured plans are. Rules promulgated by the Department are already facing tough choices; that Additionally, certain provisions of the of Health and Human Services in the new standards were not actuarially Affordable Care Act are also presumably March 2013. sound; that they were unnecessary; incentivizing small employers to self- It bears noting that ACA only and that an increase in self-insurance insure rather than to participate in the applies to employers with 50 or more by small groups would not result in state-based insurance exchanges. employees. Smaller organizations, with adverse selection against fully-insured 49 or fewer employees, do not need plans or the insurance exchanges. Federal Developments to comply with these new Affordable Rather, it was suggested that self- While it is well settled that ERISA Care Act requirements, regardless of insured plans were meant to operate insulates multistate employee benefit whether they are self-insured or not. alongside fully-insured plans. © Self-Insurers’ Publishing Corp. All rights reserved. The Self-Insurer | June 2013 43 The adverse selection argument advanced by supporters of, higher self insurance currently set forth in California law for attachment points is based on the projection that if the current attachment points all stop loss insurance policies issued remain at their existing levels, employers with young and healthy employees will self- on or after January 1, 2014. It would insure until they encounter unexpected losses, at which time they will quickly switch change the individual attachment to a public insurance exchange. However, others argue that even though young point from $95,000 to $65,000. The people do not usually have some of the health conditions that older populations aggregate attachment point would have, young people still have family medical histories, pre-existing conditions, and are need to be the greater of one of the more prone to accidents and to take maternity leave. In addition, some advocate following: that there are substantial administrative costs associated with switching from one 1. $13,000 times the total number type of health plan to another, making it less likely for all but the smallest employers of covered employees (down to switch back and forth from one plan to another. from $19,000 times the total Ultimately, the NAIC’s proposed updates narrowly failed to pass at the NAIC’s number of covered employees) November 2012 meeting. At the NAIC’s Spring 2013 meeting, the ERISA Working 2. One hundred twenty percent of Group announced that it is working on a white paper to further explore the expected claims; or potential impact of regulation of small employer self-insurance on the small group 3. $65,000 (down from $95,000). market beginning in 2014. This bill was still making its way In addition to the NAIC Model Act activity on stop loss insurance, there has through the legislative process as of been a recent flurry of proposed state legislation designed to regulate stop-loss press time. insurance. A bill passed in Colorado would In California, Senate Bill 161, if it passes, will lower the attachment points require stop loss insurers to make 44 June 2013 | The Self-Insurer © Self-Insurers’ Publishing Corp. All rights reserved. annual filings with the Colorado The Colorado Commissioner would bill has passed in the Colorado House Commissioner of Insurance with collect such data for the year s2013- of Representatives and the Colorado information including the following: 2018 and make the information publicly Senate but has not yet been signed into 1.