The "Stop-Loss" Shuffle
(Or "How To Write Insurance Without Writing Insurance, While Simultaneously Side-stepping The Fiduciary Responsibilities Imposed By ERISA")
Most employer-sponsored health and disability plans are governed by ERISA today. These plans may be either "insured" or "self-funded" . The following remarks pertain only to those plans that purport to be "self-funded" and do not apply to those "fully-insured" plans, where Insurance Companies provide direct coverage and willingly assume fiduciary responsibilities under ERISA.
The Self-Funded METs of the 1970s and 1980s:A full understanding of how "self-funded" ERISA plans work cannot really be had, without first understanding the legacy of the self-funded Multiple Employer Trusts (METs). The METs were large, uninsured, group medical plans, typically administered by "Third Party Administrators" (TPAs). They captured a large segment of the group health insurance market in the late 1970s and early 1980s. The METs pioneered many of the Managed Care concepts that we take for granted today. The METs were also among the first to try 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 (and legally suspect) ways to use "stop-loss" coverage. In gambling parlance, the obtaining of "stop-loss" coverage would be known as "the laying off of a bet". Instead of assuming 100% of the risk for the health plans sold, the TPAs would purchase "stop-loss" coverage to indemnify the "Trust" for a part of that risk, thus protecting the solvency of the "Trust" . That sounds prudent enough on the surface, but in the strange world of ERISA, things are seldom what they seem to be. In certain instances, the TPAs would purchase this "stop-loss" coverage from their own "captive" or "affiliate" . These TPAs, who were typically taking 10% to 15% of the gross "contributions" to the MET as their "administrative fee", were able to further increase their revenue by providing (or arranging for the provision of) "stop-loss" coverage to the MET. By purchasing "stop loss" coverage from their own "captive" or "affiliate" , a large portion of 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 millions of dollars.
The provision of "stop-loss" coverage to a self-funded ERISA plan, by an entity or by persons, who are in control of the Plan and its assets, is the purest example of a "conflict of interest" one can think of. But some METs did exactly that in the 1970s and 80s and many of the insurance industry giants are pulling the exact same scam today.
"Stop-Loss" Coverage: What It Is And How it Works:
There are basically two types of "stop-loss" coverage -- "specific" and "aggregate" . Under "specific stop-loss" coverage, an Insurance Company agrees to reimburse the Plan Sponsor (usually the Employer) for any claim over a certain amount, e.g. $5,000. Therefore, if the Plan carried "specific stop-loss" coverage, with a "retention" of $5,000 and John Doe, the Plan Participant incurred a hospital bill of $10,250. John might pay a $250 deductible, the "Self-funded" Plan might reimburse John 80% of the remaining amount (i.e. $8,000) and the "stop-loss" carrier would then reimburse the Plan $3,000 ($8,000 minus the Plan retention of $5,000). In this example, from the Insurance Company's perspective the "stop-loss" policy is nothing more than an extremely high deductible ($5,000) policy.
Under "aggregate stop-loss" coverage, the Insurance Company agrees to reimburse the Plan Sponsor for any amount over and above the Plan's "retention" for all claims in a given year (e.g. $1,000,000). Thus if the Plan carried "aggregate stop-loss" coverage, with a retention of $1,000,000 and incurred claims totaling $1,250,000 in a particular year, the insurance carrier would reimburse the Plan $250,000.
"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 the 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 insurance company to the "insured" employees.
When you look at the actual operation of many "self-funded" ERISA plans, what you find is that the Plan was sold to the Employer by the Insurance Company. The Insurance Company then provides the Employer with all Plan Documents, necessary to set up an ERISA plan, including the Summary Plan Descriptions (SPD) which are distributed to the employee-participants. Pursuant to these Plan Documents, the Employer becomes, for ERISA purposes, magically transformed into the "Plan Sponsor". If the Plan is to be a "self-funded" ERISA plan, then the Plan Documents will recite that the Plan is entirely "self-funded" by the Employer. Strangely, however, there will often be limited "funds" or no "funds" in the "self-funded" Plan. Instead, the Employer/Plan Sponsor may deduct "contributions" from the employees' paychecks and use that money to purchase a "stop-loss" policy. The "stop-loss" policy is always purchased from the same Insurance Company, who sold the Plan to the Employer in the first place or one of that Insurance Company's subsidiaries or affiliates. Under that "stop-loss" policy, the Insurance Company will agree to reimburse the "self-funded" Plan for as much as 100% of the losses incurred by the Plan. Thus, if the "self-funded" Plan ever pays a claim, it is a claim paid ultimately from the coffers of the Insurance Company It's just that the claim is paid indirectly, through a "stop-loss" policy, as opposed to any kind of direct insurance policy. 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 Insurance Company or its affiliated Claims Administrator, will agree to handle (for a fee) the claims administration for the Plan. Then, under another contract, the Insurance Company, or its affiliated Managed Care Company will agree to handle (for a fee) Managed Care services for the Plan.
Why All the Subterfuge?Why would any insurance company go to this much trouble? For a bunch of 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 Plan Participant, no matter what they do. Secondly, unless they voluntarily assume it, not one of these entities will have any fiduciary responsibility toward 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 at the "tail" end of the Plan.
The Avoidance of Legal Liability:Claims administration agreements, managed care agreements and "stop-loss" policies are regarded as private contracts between the various entities providing the insurance-related services and the Plan Sponsor. Typically those contracts will disclaim any fiduciary responsibility under ERISA. Since none of these contracts involve any direct obligations to the Plan Participants, those Plan Participants will have no standing to sue and no right of recovery against any of the entities providing the insurance-related services to the Plan. Any legal action by the Plan Participant must be taken against the "self-funded" Plan. (And the Plan may have no assets).
Therefore, a Managed Care Company can refuse to pre-certify medical treatment, reciting "Medical Necessity" standards and criteria that no one ever heard of before, and yet face no legal consequences for its decisions. A Claims Administrator can likewise deny a claim, without any justification whatsoever, under the Plan for doing so, and face no legal consequences for its decisions. (See: Medical Necessity Claim Denials). Although "contributions" may be deducted regularly from an employee's paycheck and used by the Plan Sponsor to pay "premiums" to a "stop-loss" carrier, the employee will have no right of action against the "stop-loss" carrier. The "stop-loss" carrier has only one insured -- the Plan Sponsor. The Plan Participant may not even know about the existence of "stop-loss" coverage.
The beauty of this "ERISA / Managed Care / Stop-loss" scheme is that it allows insurance companies to do what they have always done -- write insurance -- but without incurring any direct liability to the ultimate beneficiaries of that insurance.
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. "Fiduciary" responsibility is the highest responsibility imposed by law. It requires that the fiduciary place the interests of the beneficiaries above that of his own. Under this most basic, rudimentary legal concept, there is absolutely no room for any kind of self-interest of the fiduciary, which would conflict with that of the beneficiary. The beneficiary's interest are paramount.
Although I have seen a few instances where claims administrators assume fiduciary responsibility for the administration of "self-funded" plans, I find that to be rare. In most instances, the claims administration and managed care agreements, as well as the "stop-loss" policies are extremely careful to disclaim any fiduciary responsibility under ERISA. This creates a bit of a problem, because somebody has to be the Plan "fiduciary" under ERISA. Well, guess who that somebody is? Nine times out of ten the Employer assumed that fiduciary status, when it allowed itself to become elevated to the status of a "Plan Sponsor" . Usually, the Plan Documents that were provided to the Employer by the Insurance Company will clearly state that the Employer is the Plan fiduciary for purposes of ERISA.
The Insurance Company may have sold the Plan to the Employer in the first place; and the Insurance Company may control the administration of the plan from start to finish (making a profit every step of the way); nevertheless, the Insurance Company, through utter contrivance, may side-step not only legal liability for its actions, but fiduciary responsibility under ERISA as well.
Under the "self-funded" plan scenario, the Employer typically becomes an ERISA "fiduciary". The problem, however, is that frequently the Employer has no concept as to what that means. Most employers, particularly the smaller ones, don't even know what a "fiduciary" is, let alone that they are one. Few employers 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 required by ERISA; or how to properly construct a "decision on review" for any denial upheld after review.
What frequently happens is that the Employer passes any appealed claim denial back to the Insurance Company or Claims Administrator for handling. The Insurance Company and/or Claims Administrator, in the above example, are NOT ERISA "fiduciaries". They owe no fiduciary obligation to anyone. Nothing compels them to engage in any kind of "full and fair review" of the claim denial, as is mandated by ERISA. They have no incentive to do anything in the way of an exhaustive claims review. In the end, the Insurance Company or Claims Administrator may send out a form letter again denying the claim and the Employer may just rubber-stamp whatever the Insurance Company or Claims Administrator says -- the result often being that no further administrative review is done at all, in clear violation of Federal Law.
"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 premium 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 upon insurance companies, so that in theory they can meet their financial obligations to policyholders.
Another problem faced by insurance companies writing "traditional" group health insurance arises when the group 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" . This may not seem like a big deal to you, but believe me it is. 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 will receive no new premium dollars to offset that liability. Depending upon whether and to what extent the Insurance Company set aside "reserves" to cover the "run off" claims, every new "run off" claim cuts deep 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 the Insurance Company does is provide "stop-loss" coverage to the Plan Sponsor, that coverage may be tailored to begin on a certain date and to end on a certain date. The "stop-loss" policy may provide that the Insurance Company 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 previously 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 the "stop-loss" coverage to the Plan Sponsor.
Conclusions: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 wants to assume fiduciary responsibility under ERISA for the administration of a "self-funded" plan, that's great. If the Employer wants to assume that responsibility and is competent to do so, that's great too. But, if there is an Insurance Company lurking about, that provides "stop-loss" coverage to the Plan, while at the same time (either directly or indirectly) making final decisions regarding benefits entitlements, while at the same time disclaiming any "fiduciary" responsibility under ERISA, then that is a major faux pas under Federal Law. However, it is one that I encounter frequently.
The good news for ERISA plaintiffs (and their lawyers) is that the Federal courts are beginning to wake up to this problem. For example, courts have held that the delegation of ERISA- mandated fiduciary responsibilities to a "non-fiduciary" (such as a Claims Administrator or Managed Care Company) may result in the Court adopting a "de novo" standard of review, instead of the more limited "Deferential Standard Of Review" , that is usually accorded ERISA "fiduciaries" . Therefore, the abdication of fiduciary responsibility by the "named plan fiduciary" may be the Achilles heel of many "self-funded" ERISA plans.
Ó 1997 Michael A. McKuin - ERISA Lawyer
