H&W: Low Stop-loss Specs and the ACA

The Department of Labor (“DOL”) recently issued guidance [TR 2014-01] expressing its views on whether ERISA preempts state regulation of stop-loss insurance.  This guidance will be of interest to employers that sponsor self-insured health plans and purchase stop-loss coverage with extremely low attachment points.

For example, an employer may purchase a stop-loss policy with a specific attachment point of $5,000 or $10,000 (low stop loss spec).    This has the effect of transferring virtually all the insurance risk to an insurance carrier, rendering the employer’s plan self-insured in name only.    In practice, these types of arrangements have proven to be particularly appealing to small employers.  And, while they have been around for a long time, they have gotten renewed attention in the wake of the Affordable Care Act (“ACA”).

The ACA imposes a number of requirements on insured group health plans that do not apply to self-funded plans.  For example, insured plans for small employers must provide a long list of “essential health benefits” and meet specified coverage level options.  The stop-loss policy is not considered health insurance since it insures the employer and pays no benefits to or on behalf of any employee.  A small employer with a self-insured health plan and a stop-loss policy with a low attachment point would thus be able to have an insured plan that is not required to provide the consumer protections required of fully-insured plans with policies that are subject to the ACA.

The DOL is also concerned that these arrangements may encourage small employers with healthy employee populations to self-insure while leaving the employers with sicker employees to the SHOP exchanges.

The problem for the DOL is that these arrangements are all legal under applicable federal law.  On the other hand, States are free to regulate stop-loss carriers provided that they do not run afoul of ERISA’s preemption (i.e., invalidation) of State laws that are deemed to regulate self-insured health plans.

The DOL is the agency charged with the interpretation and administration of ERISA’s preemption provisions.  The purpose of the recent guidance is to let States know that, in the DOL’s view, laws that impose minimum stop-loss thresholds would not be preempted by ERISA.

The DOL cites, approvingly, an NAIC model statute that prohibits the sale of stop-loss insurance with a specific annual attachment point below $20,000. For groups of 50 or fewer, the aggregate annual attachment point must be at least the greater of (i) $4,000 times the number of group members, (ii) 120% of expected claims, or (iii) $20,000. For groups of 51 or more, the model law prohibited an annual aggregate attachment point that was lower than 110% of expected claims.

According to the DOL, ten States have already enacted laws based on the NAIC model.  Employers who are using or considering the use of low stop-loss limits in connection with their self-insured plans should be alert to legislative developments in their respective States that may impact that funding model.

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