How to Handle ERISA Self-Insured Plans with Stop Loss Coverage and Low Attachment Points



Question: I have a situation with an ERISA self insured plan that has stop loss with very low attachment points ----operates like a 4K deductible per person. There are substantial medical bills in the case which were paid. At this point it appears those bills were not paid by the employer, but directly to the providers by an insurance carrier. The whole plan was set up following the new care health law and sold to a very small employer as self insurance. Employer has reimbursement rights in plan for amounts they paid. If the insurance carrier paid the claims directly to the health providers, does that in anyway limit employers reimbursement rights or will it be treated as an irrelevant accounting issue? This is really operating as an insurance policy but I'm aware that the test is whether or not the employee has a claim against the carrier or the employer. The employer is in Virginia, where subrogation for PI claims is not allowed in insurance contracts.


Answer: As you may know, if a plan is self-funded or self-insured the ‘deemer clause’ of ERISA exempts these plans from state laws that “regulate insurance” within the meaning of the savings clause, and thus self-funded ERISA plans are exempt from state regulation insofar as that regulation relates to the plans. See FMC Corp. v. Holiday, 498 US 52 (1990). It is very common for self-insured groups to purchase stop loss insurance to protect themselves. Generally the underlying plan of benefits does not affect whether or not a plan would purchase stop loss insurance. As in your case, there is the potential for stop-loss coverage to blur the line between fully-insured and self-insured plans.

Stop loss coverage with a very low attachment point can appear very much like a conventional health plan with a high employee deductible. The NAIC has proposed raising the minimum thresholds for small groups in order to brighten the line between insured and self-insured plans to stabilize small group insurance markets but currently this practice is still accepted. In addition, historically the use of “stop-loss” insurance does not transform a self-funded plan into an insured plan. Bill Gray Enter., Inc. Emp. Health & Welfare Plan v. Gourley, 248 F.3d 206 (3rd Cir. 2001), American Medical Security, Inc. v. Bartlett, 111 F.3d 358 (4th Cir. 1997); and Goyen v. Vail Corp., 2011 WL 4479091 (D. Colo. Sept. 26, 2011). Courts have reasoned that stop loss arrangements do not change the fact that the ultimate liability to plan participants remains with the Plan.

It would appear that a self-funded ERISA plan, even with stop-loss coverage, is likely not subject to state law defenses that may otherwise be available in reducing a plan’s reimbursement interest. Additionally, based on the recent ruling by the Supreme Court, the plain language of a health plan will control the resolution of any lien unless the plan is silent as to traditional equitable doctrines. See U.S. Airways, Inc. v. McCutchen, 2013 WL 1567371 (April 16, 2013). However, there is one potential exception which could be argued under the circumstances you present.

In some cases an attachment point could be set very low and the Plan could be attempting to function as and enjoy the benefits of a self-funded plan under ERISA when in fact it is really an insured plan. Such examples would include a specific attachment point of $500 (individual claim) or $25,000 for an aggregate attachment point (total benefits paid for all participants). In such cases, a court could arguably look to the substance of the Plan rather than its alleged form. See Brown v. Granatelli, 897 F.2d 1351, 1355 (5th Cir. 1990). In determining whether a stop-loss Plan is truly self-funded or merely illusory, a court could look to the loss experience and how often the stop-loss coverage has applied. I don’t know that the fact the carrier made payments will make a difference but it certainly wouldn’t hurt your argument.


John Cattie
MSP Compliance Attorney

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