"Certainly he can present a bill for such services; after all -- we are not Communists." Don Barzini, The Godfather, Part I.
(Employer-sponsored health and long term disability plans are either "insured" or"self-funded". The following remarks pertain to those plans that purport to be "self-funded". Insured plans are structured differently and are subject to different regulations.)
The Self-Funded METs of the 1970s and 1980s:
To appreciate how today’s "self-funded" ERISA plans work, it’s helpful to understand the legacy of the Multiple Employer Trusts (METs), which captured a large segment of the group health insurance market in the late 1970s and early 1980s. These were large uninsured group health plans, administered by "Third Party Administrators" (TPAs), many of whom actually sold the plans to employers -- usually small and medium sized employers, who could not afford to "self-fund" a health plan on their own.
The METs pioneered many of the managed care concepts we take for granted today. They were also among the first to use ERISA and its "pre-emption" clause to legitimize their operations. (See e.g.: Insurance Prepaid Benefits Trusts v. Marshal, 90 F.R.D. 703; 1981 U.S. Dist.LEXIS 14888 (CD Cal., 1981).
The METs also devised new ways to use "stop-loss" coverage. In gambling parlance, "stop-loss" insurance would beknown as "the laying off of a bet". Instead of assuming 100% of the risk for the health plans sold, TPAs would purchase "stop-loss" coverage to indemnify the "Trust" for a part of that risk, thus protecting the solvency of the "Trust". Sounds prudent enough on the surface, but in the strange world of ERISA, things are seldom what they seem.
In some instances, the TPAs would buy this coverage from their own "captive" or "affiliate". These TPAs, who were
already taking 10% to 15% of the gross "contributions" to the MET for "administrative fees", were able to increase revenues further, by arranging for the provision of "stop-loss" coverage for the MET by an entity that they controlled. Then, the "trust funds" that were ostensibly held to pay claims, could be diverted to the "captive" or "affiliate" in the form of premiums paid for the "stop-loss" coverage. It was a shell game involving many millions of dollars. This scheme was a classic example of an ERISA "conflict of interest". Practically all of the METs went bankrupt, eventually.
"Stop-Loss" Coverage: What it is and How it Works:
A "stop-loss" policy may consist of only a page or two, to which a copy of the "plan document" is attached. The "stop-loss" policy may then incorporate the insuring provisions of the Plan so that it parallels those of the Plan. The most important provisions of a "stop-loss" policy are those specifying the carrier's liability limit, both "specific" and "aggregate". Viewed in reverse, these provisions effectively define the self-funded plan's risk exposure or "retention". "Specific stop-loss" coverage reimburses the Plan for any claim over a certain amount, (e.g. $5,000). "Aggregate stop-loss" coverage reimburses the Plan for any amount over and above the Plan's "retention" for all claims in a given year (e.g. $1,000,000).
"Stop-loss" Coverage As a Vehicle for Selling Insurance that Really Isn’t Insurance:
Frequently, "stop-loss" policies are combined with a "self-funded" ERISA plan, in such a way so that the operative effect is almost the same as if a health insurance company had issued a traditional group insurance policy in the first place -- but with an interesting twist -- there is no direct liability of the insuring company to the "insured" employees.
When it comes to so-called "self-funded" plans, there will often be limited "funds" or no "funds" in the Plan itself. Instead, the employer / "plan sponsor" may deduct "contributions" from the employees’ paychecks and use that money to purchase a "stop-loss" policy. Under some "stop-loss" policies, the insuring company might agree to reimburse the "self-funded" Plan as much as 100% of the losses incurred by the Plan. (i.e. all risk is passed through to the stop loss carrier). In this scenario, the "self-funded" Plan is nothing more than a vehicle for purchasing insurance. Then, under a separate contract with the employer, the "stop loss" carrier’s affiliated claims administrator, will agree to handle (for a fee) the claims administration for the Plan. Then, under perhaps another contract, the "stop loss" carrier’s, affiliated Managed Care Company will agree to handle (for a fee) case management services for the Plan (such as pre-certifications for proposed treatment).
Why All the Subterfuge?
Why would any insurance company go to this much trouble? For several reasons. First of all, by breaking down the various insurance-related services into: claims administration, managed care, stop-loss, etc., a separate company, affiliate or subsidiary can bill for each service rendered. Not one of these entities will have any contractual obligation to the plan participant; therefore, they will have no legal liability to the "insured", no matter what they do in relation to the Plan. Secondly, except as imposed by law, these entities may have little or no fiduciary responsibility to the Plan or the plan participants. Thirdly, as far as the "stop-loss" carrier is concerned, it can jump "off the risk" any time it wants, incurring no liability for any unreported claims. (discussed below).
The Avoidance of Legal Liability:
A "stop-loss" policy is regarded as a private contract between the carrier and the employer /"plan sponsor". Technically, the "stop-loss" carrier has only one insured -- the "plan sponsor". Therefore, a plan participant may have no standing to sue and no right of recovery against the "stop-loss" carrier. In fact, the plan participant may not even know about the existence of the "stop-loss" arrangement.
The Imposition and Avoidance of Fiduciary Responsibility:
Under ERISA’s scheme, fiduciary responsibilities are imposed upon anyone who exercises final decision-making authority regarding plan benefits. ERISA requires that there be a "named fiduciary", responsible for making such final decisions. The concept of fiduciary responsibility is essentially derived from trust law. It is the highest responsibility imposed by law and it requires that the fiduciary place the interests of the beneficiaries above his own.
In most instances, claims administration and managed care agreements, as well as "stop-loss" policies are careful to disclaim fiduciary responsibility under ERISA. This creates a problem, however, because somebody has to be the Plan fiduciary under ERISA. Since the employer is usually the named "plan administrator" (as well as the "plan sponsor"), by default the employer assumes that fiduciary status, often without knowing it. Unless the employer has specifically delegated that responsibility to another entity, it remains responsible. And most employers have no concept of what that means. Few know anything about ERISA; or about the fiduciary responsibilities imposed by ERISA; or about how to properly discharge those responsibilities to the plan participants. The employer may not even know how to perform a simple administrative review of an appealed claim denial, as is required by ERISA; or how to properly construct a final determination on review for any denial upheld after review. What frequently happens is that the employer passes any appealed claim denial back to the "stop loss" carrier or claims administrator for handling and if the employer is involved at all, it may just rubber-stamp whatever the "stop-loss" carrier or claims administrator says.
The "stop-loss" carrier may have sold the Plan to the employer in the first place; and it may control the administration of the plan from start to finish (making a profit every step of the way); nevertheless, through utter contrivance, it may try to side-step legal liability for its actions. However, under ERISA any entity exercising discretionary authority over management of the plan or disposition of its assets is a "deemed" fiduciary, whether they technically disclaim it or not.
"Stop-Loss" Coverage: Now You See It - Now You Don’t:
An insurance company, writing "traditional" group health insurance, must correctly anticipate its claims liability and adjust premiums accordingly. If the insurer is careless, incompetent or just unlucky, it can sustain serious financial loss. That is why various state insurance laws impose capital and surplus requirements on insurance companies, so that in theory they can meet their financial obligations to policyholders. That includes certain continuing obligations, when a plan terminates. At that point, the insurer is still responsible for paying all "incurred but not reported" (IBNR) claims. This is also called the "run off", or "the tail". IBNR claims may extend out for months after the termination date of coverage. During this period, the insurance company will be responsible for paying the "run off" claims, but it will receive no new premium dollars to offset that liability. Depending upon the extent to which the insurance company set aside "reserves" to cover the "run off", every new claim cuts deeper into the insurance company profits. The IBNR losses can be staggering if you’re talking about a large group or block of business.
But if all an insuring company does is provide indirect "stop-loss" coverage to a "self-funded" Plan, that coverage may be tailored to begin on a certain date and to end on a certain date. The policy may provide that the "stop-loss" carrier will not be responsible for any "run off" claims after a certain date. Furthermore, if it looks like the "self-funded" Plan is experiencing or is about to experience unexpected losses, the "stop-loss" carrier may give notice, terminate its contract abruptly and fade out of sight, after having picked up some nifty profits for the time period that it did provide coverage.
Is there anything legally wrong with what I call the "stop-loss shuffle"? It basically depends upon: "Who’s calling the shots?" If an insurance company or claims administrator assumes fiduciary responsibility under ERISA for the administration of a "self-funded" plan, that’s great. If an employer wants to assume that responsibility and is competent (and solvent enough) to do so, that’s fine too. But, if there is an insuring company lurking in the background, providing "stop-loss" coverage to the Plan, while (either directly or indirectly) making final decisions regarding benefits entitlements, and while simultaneously disclaiming any "fiduciary" responsibility under ERISA, then that is a major faux pas under federal law.
Postscript: The first draft of this article appeared in 1997. Since then, the type of plan described has almost disappeared. There are very few small and medium sized employer self-funded health plans left. But every now and then I still encounter one, so the above comments remain valid, at least for the time being.
THE "STOP-LOSS SHUFFLE"
How Insurance Companies Can Misrepresent Coverage
and Side-Step Fiduciary Responsibilities Imposed by
By: Michael A. McKuin
Revised: August 2015
ERISA Disability Lawyer