Dewitt and her husband, Anthony, were covered under Proctor’s health insurance plan. Throughout Dewitt’s tenure at Proctor, Anthony suffered from prostate cancer and received expensive medical care. His covered medical expenses were paid by Proctor, which was partially self-insured. It paid for members’ covered medical costs up to $250,000 per year. Anything above this “stop-loss†figure was covered by a policy issued by the Standard Security Life Insurance Company of New York. Dewitt v. Proctor Hosp., 517 F.3d 944 (C.A.7 (Ill.) (February 27, 2008)
Group health plans are self-funded or they are insured. That employers or plans purchase stop loss insurance makes no difference to the self-funded status of these plans under ERISA.
So why do so many commentators, and even the venerable 7th Circuit Court of Appeals (in an opinion concurred in by Judge Posner no less) used the confused phrase, “partially self-insured”? It is a troublesome phrase that adds nothing to analysis. ERISA knows nothing of “partially” insured or self-funded plans.
The Fourth Circuit has explained the matter well on several occasions. From Georgetown University Hosp. v. Reliance Standard Life Ins. Co., 175 F.3d 1014 (1999) (unpublished):
In American Medical Security Inc. v. Bartlett, 111 F.3d 358, 360(4th Cir.1997), we held a Maryland insurance regulation fixing minimum attachment points applicable to self-funded plans’ stop-loss insurance policies to be preempted by § 514(a) of ERISA, 29 U.S.C. § 1144(a). In doing so, we noted that
[u]nder a self-funded plan, the employer who promises the benefit incurs the liability defined by the plan’s terms. That liability remains the employer’s even if it has purchased stop-loss insurance and even if the stop-loss insurer becomes insolvent. Conversely, if the employer becomes insolvent, the solvency of the stop-loss insurer may not benefit plan participants and beneficiaries. This is because their claims against the insurer would be derivative of the plan’s claim against the insurer, which arises only after the plan actually makes benefit payments beyond the attachment point. In contrast, when a plan buys health insurance for participants and beneficiaries, the plan participants and beneficiaries have a legal claim directly against the insurance company, thereby securing benefits even in the event of the plan’s insolvency. Participants and beneficiaries in self-funded plans may not have the security of the insurance company’s assets because stop-loss insurance insures the plan and not the participants.
American Medical Security, 111 F.3d at 364.
And then again:
This appears to be an issue of first impression in this circuit. We agree with the district court that stop-loss insurance does not convert Talquin’s self-funded employee benefit plan into an insured plan. Even with the stop-loss coverage, Talquin’s Plan is directly liable to Talquin’s employees for any amount of benefits owed to them under the Plan’s provisions. The purpose of the stop-loss insurance is to protect Talquin from catastrophic losses, it is not accident and health insurance for employees. Instead of covering employees directly, the stop-loss insurance covers the Plan itself. Thus, for the purposes of ERISA, the Plan remains self-funded even with the stop-loss insurance.
Thompson v. Talquin Bldg. Products Co., 928 F.2d 649 (4th Cir. 1991)
Other authorities noted on this issue by the Fourth Circuit in Thompson include cases from the Fifth and Ninth Circuits:
The Ninth Circuit’s decision in United Food & Commercial Workers & Employers Arizona Health & Welfare Trust v. Pacyga, 801 F.2d 1157, 1161-62 (9th Cir.1986), supports this conclusion. The Ninth Circuit held that the stop-loss insurance provision in an ERISA plan did not render that plan insured for preemption purposes:
The stop-loss insurance does not pay benefits directly to participants, nor does the insurance company take over administration of the Plan at the point when the aggregate amount is reached. Thus, no insurance is provided to the participants, and the Plan should properly be termed a non-insured plan, protected by the deemer clause….
801 F.2d at 1161-62. See also Brown v. Granatelli, 897 F.2d 1351, 1354-55 (5th Cir.1990) (state law does not regulate employer’s self-insured plan with stop-loss coverage; distinguishes between stop-loss insurance and primary coverage on basis that stop-loss only covers plan itself and plan is still liable to employees; does not reach ERISA preemption issue); Moore v. Provident Life & Accident Ins. Co., 786 F.2d 922, 927 (9th Cir.1986) (holds that stop-loss insurance does not make self-funded ERISA plan insured plan under “saving clause†and “deemer clause;†ERISA therefore preempts state law). But see Northern Group Servs., Inc. v. Automobile Owners Ins. Co., 833 F.2d 85, 91 (6th Cir.1987) (stop-loss coverage renders otherwise self-insured plan an insured plan under ERISA). [see note below – this case was abrogated in Lincoln Mut. Cas. Co. v. Lectron Prods., Inc., Employee Health Benefit Plan, 970 F.2d 206, 210 (6th Cir.1992) – RFH] We find the Ninth Circuit’s reasoning persuasive, and on its basis hold that ERISA preempts state law as applied to the Plan.
ERISA does not suggest any notion of hybrid “partially” self funded plans. Stop loss carriers are subject to state regulation as insurance companies. See Avemco Ins. Co. v. State ex rel. McCarty, 812 N.E.2d 108, (Ind.App. 2004). Self funded health plans are exempt by virtue of ERISA’s deemer clause. The purchase of stop loss insurance by the plan sponsor is irrelevant.
Note: If a stop loss carrier takes over plan administration, then the plan could lose the protection of the deemer clause. See,
Thompson v. Talquin Bldg. Products Co., 928 F.2d 649 (4th Cir. 1991)
The stop-loss insurance does not pay benefits directly to participants, nor does the insurance company take over administration of the Plan at the point when the aggregate amount is reached. Thus, no insurance is provided to the participants, and the Plan should properly be termed a non-insured plan, protected by the deemer clause….
The conclusion is premised on the carrier not interposing itself in the claims administration process. E.g., see :: The Critical Flaw In Stop Loss Carrier Reimbursement Claims
Additional Authorities – For a more recent update on applicable law:
First, it is well-settled that a plan covered by stop-loss insurance still is considered self-funded, and exempt from state insurance laws. See, e.g., Lincoln Mut. Cas. Co. v. Lectron Prods., Inc., Employee Health Benefit Plan, 970 F.2d 206, 210 (6th Cir.1992) (holding that even though an ERISA plan had stop-loss coverage, the plan was still self-funded and not subject to state insurance laws); Brown v. Granatelli, 897 F.2d 1351, 1355 (5th Cir.1990) (same); United Food & Commercial Workers & Employers Arizona Health & Welfare Trust v. Pacyga, 801 F.2d 1157, 1161-62 (9th Cir.1986) (same); see also, e.g., American Med. Sec., Inc. v. Bartlett, 111 F.3d 358, 364-65 (4th Cir.1997) (holding that state could not regulate how benefits plans obtain stop-loss insurance). Rather, in FMC Corporation v. Holliday, 498 U.S. 52, 111 S.Ct. 403, 112 L.Ed.2d 356 (1990), the United States Supreme Court held that if an ERISA plan owns insurance, then state law may apply to the plan’s insurer, but not directly to the plan. See id. at 61, 111 S.Ct. 403. Thus, even though the Plan in this case has stop-loss insurance, Maine law does not apply to the Plan. Maine law applies to the Plan’s stop-loss insurer, LDG/State Mutual, but LDG/State Mutual is not a party to this action, nor has it acted to induce Plaintiff to sign the disputed subrogation agreement. Similarly, state law regulates Healey & Associates, the insurance agency that aided Crowe Rope in structuring the Plan and in purchasing the stop-loss policy from LDG/Mutual. Likewise, Plaintiff has not named Healey & Associates as a defendant, nor has Plaintiff alleged that Healey & Associates has done anything adverse to her. Moreover, the Court finds it irrelevant that Defendants hired Healey & Associates to help structure the Plan and to act as broker.
Harvey v. Machigonne Benefits Administrators, 122 F.Supp.2d 179 (D.Me. 2000)
Sixth Circuit – Also from Harvey:
In its argument that the Plan is subject to state insurance laws based on its ownership of stop-loss insurance, Plaintiff erroneously relies on Northern Group Servs., Inc. v. Auto Owners Ins. Co., 833 F.2d 85, 91 (6th Cir.1987). In Lincoln, the Sixth Circuit expressly held that Northern ’s holding on this matter was no longer viable in light of FMC. See Lincoln, 970 F.2d at 210 n. 3. [Lincoln Mut. Cas. Co. v. Lectron Prods., Inc., Employee Health Benefit Plan, 970 F.2d 206, 210 (6th Cir.1992)]
Posner On Stop Loss – This isn’t the first time this issue has escaped the attention of the judge. In an earlier post I noted that:
The case is overall well-reasoned, but Judge Posner does seem careless in his choice of language at times. For example, Posner writes that “[s]top-loss insurance is an insurance policy for losses that the insured self-insures up to the limit of the deductible.†That is incorrect.
If that were true, then the stop loss carrier would be insuring the participant after the attachment point. Posner’s other comments reveal, however, a grasp of the notion that stop policies do not run to plan participants, so overall, the Court gets to the correct result.
For example:
The magistrate judge’s ruling that stop-loss insurance is reinsurance under Wisconsin law is perhaps understandable, because “unlike traditional group-health insurance, stop-loss insurance is akin to reinsurance in that it does not provide coverage directly to plan members or beneficiaries.†Travelers Ins. Co. v. Cuomo, 14 F.3d 708, 723 (2d Cir.1993), reversed on other grounds, 514 U.S. 645, 115 S.Ct. 1671, 131 L.Ed.2d 695 (1995).
I think part of the confusion arose from language Posner borrowed from a treatise, the language of which implied a bifurcation of risk.