Thanks to a recent U.S. Supreme Court decision, involving the Employee Retirement Income Security Act (ERISA), state regulation of health care is likely to increase substantially. Both insured and self-insured health benefit plans will be affected, including stop-loss policies that bridge the gap between insured and self-insured plans.
In fact, the Supreme Court case is a good example of a very mundane fact pattern leading to a significant legal pronouncement, which should not be overlooked by the health care community.
A. The Facts
The case, UNUM Life Insurance Co. v. Ward, was decided by the Supreme Court in April of 1999. It involved disability benefits for an employee, John Ward, who submitted his claim after the policy deadline.
UNUM argued that the late submission barred the claim. Ward argued that under California law the claim would be barred only if UNUM could show that it was prejudiced by the delay, for example, the delay pre-vented UNUM from investigating the matter properly. UNUM responded that the state law, referred to as the "notice-prejudice rule," was preempted by federal law, namely ERISA, and therefore did not apply to Mr. Ward.
B. Preemption and the Insurance Exception
ERISA preempts, or overrides, state laws that relate to employee benefit plans, and therefore such state laws do not apply to the benefit plans. However, the ERISA preemption provision has an exception. State laws that regulate "insurance" are not overriden by ERISA. UNUM and Ward agreed that the notice-prejudice rule related to an employee benefit plan, but they disagreed on whether it was saved from preemption as a law regulating insurance.
C. The Supreme Court Decision
The Supreme Court said the test for whether a law regulates insurance has two steps. First, courts should use a common-sense view of the matter to determine whether the law regulates insurance.
Second, courts should look to three factors to determine whether the practice being regulated is an insurance practice, namely:
1. Does the practice have the effect of transferring or spreading a policyholder's risk?
2. Is the practice an integral part of the policy relationship between the insurer and the insured?
3. Is the practice limited to entities within the insurance industry?
The Court held that the notice-prejudice rule regulates insurance, as a matter of common sense. In regard to the second step, the Court held, for the first time, that the law in question does not have to satisfy all three factors. The Court said the three factors are relevant, rather than required, and characterized them as "checking points or guideposts."
In applying the three factors to the notice-prejudice rule, the Court found that the rule is an integral part of the policy relationship between the insurer and the insured (the second factor) because it is a mandatory contract term. The Court also found that the rule is limited to entities within the insurance industry (the third factor).
Since two of the factors were satisfied, there was no need to decide whether the rule transferred or spread a policyholder's risk (the first factor).
The Court did not discuss how many of the three factors must be satisfied to find that a state law regulates insurance, and left open the possibility that state laws may be considered to regulate insurance even if they satisfy only one (or perhaps even none) of the three factors.
D. Stop-Loss Insurance
The likely effect of the UNUM decision is that insured employee benefit plans will become subject to more state regulation, because more aspects of such regulation will be deemed saved by the insurance exception to ERISA preemption. However, the more subtle consequence of UNUM is that states may also be able to subject self-insured employee benefit plans to more regulation.
In fact, one of the first tests of the breadth of the UNUM decision may come in litigation involving the efforts of the Maryland Insurance Commissioner to regulate stop-loss insurance that is sold to self-funded employee health benefit plans.
Stop-loss coverage picks up after an employee benefit plan has paid out a specified dollar amount (the attachment point), either per claim or per participant, or on an aggregate basis, and therefore limits a self-funded plan's exposure.
Historically, it was believed that ERISA preemption freed self-funded employee health benefit plans from offering state-mandated benefits, for example, mammograms. By purchasing stop-loss coverage with a low attachment point, a self-funded employee benefit plan could effectively shift most of its risk to an insurer, while technically remaining self-funded and avoid providing its employees with expensive state-mandated benefits.
In 1996, the Maryland Insurance Commissioner's efforts to regulate stop-loss coverage were overturned by the federal courts, in part because the regulations satisfied only one of the three relevant factors. Under the analysis used by the Supreme Court in UNUM, though, one factor may be enough.
In 1999, the Maryland legislature passed House Bill 1086, which provides that an insurer may not sell a stop-loss policy in Maryland if the attachment point is less than $10,000 per participant or 115% of aggregate expected claims. The Maryland Insurance Commissioner has announced that he will enforce the new law, and another challenge in federal court seems inevitable. Under UNUM, however, the new Maryland law might pass muster this time around.
Whether or not the situation involves self-funded employee health plans, UNUM will likely embolden state legislatures generally to take an even more active role in the relationship among patients, health care providers and those that fund health care.