Q: What is ERISA preemption? How does Federal law (ERISA) prevent Florida from mandating what benefits a health plan covers?
A: Federal law (ERISA) generally prevents states from directly regulating any fringe benefit that an employer provides to employees, including health benefits. This exemption from state regulation is generally referred to as ERISA preemption.
There is one significant exception to ERISA preemption. ERISA preemption does not apply to state laws that regulate insurance. As a result, typically, state benefit mandates, such as the Florida autism insurance mandate, only affect an employer sponsored health benefit plan if the employer purchases insurance. The insurance company must bear the risk of employees’ health care costs. All other employer sponsored benefit plans are exempt from state insurance mandates.
Congress enacted ERISA to address significant failures of employer sponsored pension plans during the 1970s. ERISA preemption initially was implemented to replace a patchwork of state pension laws with uniform Federal law. As part of the negotiation process before enactment, Congress expanded ERISA (and ERISA preemption) to cover all employer sponsored benefit plans. ERISA includes extensive procedural regulation of pension and other benefit plans and extensive substantive regulation of pension benefits. However, ERISA includes negligible substantive regulation of health benefits. No Federal law and few state laws require employers to provide any health care coverage as a fringe benefit. Most state health insurance mandates, and a single Federal health insurance mandate, require only that employers include specified benefits when electing to offer health plans or specific health plan coverage. For example, the parity mandate in the Mental Health Parity and Addiction Equity Act of 2008 (Mental Health Parity Act) applies only if an employer elects to provide mental health coverage.
Q: What is a self-insured (self-funded) benefit plan?
A: Some employer sponsored health benefit plans elect to bear the risk of their employees’ health care costs by directly insuring the benefits with company assets rather than with an insurance policy. These plans are considered self-insured because the employer bears the risk of employees’ health care costs. ERISA preemption is effective because ERISA provides that self-insured plans are not subject to state insurance regulation. Plans that self-insure can be sponsored by private sector employers (including for-profit and non-profit) and by government employers.
In most cases, employers that sponsor a self-insured health plan sign a contract with a third party administrator (TPA) to administer plan benefits. Plan administration includes responsibilities such as contracting with health care providers, answering beneficiary questions, performing utilization reviews (including determinations of medical necessity), reviewing claims forms, and denying and paying claims. Most TPAs are insurance companies or HMOs, typically because their plan administration expertise permits them to perform the services for lower costs than employers, regardless of size. TPAs have no direct obligation to pay claims to health plan participants. Employers reimburse TPAs for such costs. Because an employer has the direct insurance risk under a self-insured plan, to resolve disputed benefit rights, employees and other plan participants must sue the employer that sponsors the plan, not the TPA. Such a hurdle makes disputing claims denials in court difficult for an employee whose need to keep a job (and the insurance) exceeds the value of the dispute.
Self-insured plans are sometimes referred to as self-funded plans because the employer is obligated to use its own funds to reimburse the TPA for all claims paid. Interestingly, ERISA creates a loophole that allows employers to self-insure health benefit plans by purchasing “stop-loss” insurance without losing the self-insured designation. Stop-loss insurance reimburses the employer for health plan benefit costs above specified deductibles. Self-insurance is riskier for smaller employers because they cannot spread any catastrophic losses of a single employee across a broad base of employees. Stop-loss insurance allows smaller employers to self-insure their health plans when they would otherwise not have the resources to incur a catastrophic loss. If the deductibles are identical for stop-loss insurance and health insurance, there is essentially no financial difference in insurance risk between non-exempt third party health insurance and the exempt combination of self-insurance, third party administration, and stop-loss insurance. The only significant financial difference arises if stop-loss insurance premiums and TPA fees together are more expensive than health insurance premiums for the same coverage.
Few states have successfully regulated the amount of stop-loss insurance an employer can purchase or the deductibles of that insurance. It may be possible to enact effective state legislation that mandates health benefits for self-insured plans through more extensive regulation of stop-loss insurance without violating ERISA preemption.
Q: How does my employer’s decision to self-insure health benefits affect a state autism insurance benefits mandate?
A: Self-insured health plans are exempt from state autism insurance benefits mandates because of ERISA preemption. Unless another exemption applies, employers that insure their health plan benefits with an insurance policy or HMO contract must comply with the mandate. ERISA preemption does not apply to state laws that regulate insurance.
Q: How many Floridians are covered by self-insured health plans?
A: [The data in this section has not been updated since 2008.] In 2005, approximately two-thirds of all Floridians who worked for a medium or large employer (50 or more employees) and were insured under that employer’s health plan were enrolled in a self-insured plan. According to the US Department of Health & Human Services, in 2005, of Florida’s 5.2 million private sector employees who worked for medium and large employers (50 or more employees) that offered health insurance, approximately 67% (3.5 million) of these employees took advantage of that insurance, and approximately 68% of these insured employees (2.4 million) were enrolled in self-insured plans. These percentages do not include government employees, employees of exempt small employers, uninsured workers, or any of their dependents. See Chapter 4).
Q: What motivates an employer to self-insure a health plan?
A: There are numerous reasons why self-insurance is attractive to employers that sponsor health plans, most of which directly affect an employer’s profits:
- Self-insured plans avoid paying health insurance premiums and premium taxes.
- Employers are free to structure health benefits to meet a budget.
- Employers can avoid the cost of complying with multiple state insurance mandates. Recent estimates (click here and click here) indicate that Florida has adopted more than 50 health insurance mandates.
- An employer with operations in multiple states can offer uniform benefits, avoid the increased administrative expenses an insurance company would change to provide different benefits in different states, and avoid the need to prepare different communications to its employees in different states.
Such potential savings can outweigh self-insurance risk, even for smaller employers. Smaller employers, for which self-insurance is riskier, also can use a portion of such savings to pay the cost of stop-loss insurance (which we describe above) and offset self-insurance costs. For all these reasons, employers that would be subject to the mandate were more likely to consider changing their plan structure to self-insurance between April 1, 2009 and April 1, 2010 so that Florida’s autism insurance mandate does not apply.
The perceived unfairness of today’s health care environment arises from several closely related factors. While many blame insurance companies, employers and health care providers also play a critical role. Many corporations, particularly public companies, focus heavily (sometimes excessively) on quarterly profit growth. Health care costs (including prescription costs) have skyrocketed in recent years, far in excess of core inflation rates. Health care inflation is driven in part by demands for quarterly profit growth and in part by inefficiencies in the health care system. Insurance premium growth has also increased dramatically, reflecting both health care inflation and demands for quarterly profit growth. Employers seeking to cut expenses in a difficult economic environment want to be able to manage their health care costs, including by cutting benefits. The parallel regulatory schemes for insured plans and self-insured plans permit many employers to elect health plan alternatives that are both cheaper and narrower in scope.
For these reasons, and others, corporations, including health insurance companies, strongly oppose insurance mandates. Insurance companies (and HMOs) and their agents want to be able to offer full service health insurance benefit alternatives that are price competitive with self-insurance. But, with mandates in place, they are likely to enhance their education efforts to help corporate plan sponsors better understand how to self-insure their health plans, contract with the insurance company as a TPA to administer plan benefits, purchase stop-loss insurance, and avoid altogether Florida’s insurance mandates, including the autism insurance mandate. Insurance companies (and HMOs) are also likely to sign a developmental disabilities compact that permits them to offer other less expensive alternatives.
Our nations’ employer sponsored health care program is broken. In a world where medium and large corporations, particularly public companies, must focus almost exclusively on quarterly shareholder growth, the need to provide employee benefits more often than not becomes less important than cutting costs. It is true that “health insurance benefits remain an important tool for attracting good employees and retaining good employees.” But, employees make job decisions based on imperfect information. Typically, employers claim to offer “full health benefits” or “comprehensive health benefits” without explaining what that means or providing copies of the plan documents. The summary plan description (SPD) is the best place for employees to find sufficient details to understand all benefit exclusions. It is often difficult to get a copy of the SPD, despite an ERISA mandate to deliver SPDs. We expect that few employees compare the substance of health care plans when job hunting or, once hired, take the time to evaluate the scope of a plan’s coverage until pre-clearance is required or a claim is rejected.
Yet, while many employers continue to offer a health benefits plan, parallel efforts of employers and insurance companies are slowly eliminating coverage of selected conditions they consider too expensive. Employees may expect that their employer sponsored health plans will cover most of their heath care expenses. But, until employees learn that not all health plans provide the same benefits with the same exclusions, employers, insurance companies, and politicians can combine their efforts and focus on issues related to affordability and alternative sources of health care. The end result could be the gradual elimination of the employer sponsored comprehensive health care that many employees have taken for granted (for example, see McCain health plan would be a step back from employer coverage, sunsentinal.com and AP July 7, 2008).
Q: Are there any exceptions to ERISA preemption?
A: Currently, the most prominent federal legislation to mandate health benefits by overriding ERISA preemption are:
Mental Health Parity and Addiction Equity Act of 2008 (Mental Health Parity Act): The Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (Mental Health Parity Act) (see also Mental Health Parity Watch – Understanding the Law) does not mandate coverage. The Mental Health Parity Act only eliminates discrimination by plans that voluntarily cover mental health conditions, including ASDs:
“The law requires that any group health plan that covers more than 50 employees and offers mental health and/or substance use disorders coverage must provide that coverage with no greater financial requirements (i.e., co-pays, deductibles, annual or life-time dollar limits) or treatment limitations (i.e., number of visits) than the predominant requirements the plan applies to substantially all medical / surgical benefits. Note, however, that the law does not require employers to cover mental health or substance use treatments if they are not already offered.”
- For those who do not know, autism spectrum disorders are a mental health condition. The American Psychiatric Association’s Diagnostic and Statistical Manual-IV, Text Revision (DSM-IV-TR) is the main diagnostic reference used by mental health professionals and insurance companies in the US. Many health care plans refer to DSM-IV to define mental health conditions. DSM-IV includes autism spectrum disorders as a mental health condition.
- Many families receiving new benefits in 2011 for their children with ASDs may incorrectly attribute the change to a state autism benefits mandate when, in fact, the benefits were required by the Mental Health Parity Act.
Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (Affordable Care Act): The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (Affordable Care Act) sets the table for more dramatic change. Depending on how the legislation is implemented, health plans with mandatory coverage for children with ASDs could be made available for all families. Kathleen Sebelius of the Department of Health and Human Services, announced that, starting in 2014:
“The Affordable Care Act ensures Americans have access to quality, affordable health insurance. To achieve this goal, the law ensures plans offered in the new Health Insurance Exchanges, and in the individual and small group markets, offer a package of essential health benefits that are equal in scope to what employers typically offer today.”
- The Affordable Care Act defines these essential health benefits to include:
“at least the following general categories and the items and services covered within the categories: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care.”
The Department of Health and Human Services is responsible for developing the essential health benefits package. In the fall of 2011, HHS will launch an effort to collect public comment and hear directly from all Americans who are interested in sharing their thoughts on this important issue. Learn more about this process.
Q: Will I know if my health plan is exempt from my state’s autism benefits mandate because the plan is self-insured?
A: Most people are not aware of the difference between insured and self-insured plans. While your plan may be exempt from the mandate, you may have assumed that the mandate applies because an insurance company or HMO answers your questions, receives your claim forms, and denies and pays your claims. As we mentioned above, these companies can act either exclusively as a TPA, which only administers plan benefits, or as an insurer of plan benefits, which also administers plan benefits. Unless you see the invoices to reimburse the TPA for costs related to insuring employees, or someone tells you that your plan is self-insured, you would not easily be able to perceive a difference.
Q: How can I determine if my employer has self-insured my health plan without asking my employer?
A: “Q&A: Identifying Exempt Self-Insured Plans – Basic Information” addresses in more detail whether you should ask your employer and how you can preliminarily evaluate this question on your own.
These general answers may or may not apply to your specific circumstances. You should consult a lawyer or other specialist if you think you are entitled to benefits that you do not receive. Behavioral Lifeboat can help you do that.
If you have questions, please comment below.
© 2011 Behavioral Lifeboat, Inc.