The Department has agreed with EBM that certain of its ventures are within ERISA and are regulated by the Department of Labor. Indeed, the appealed order provided: â€œBelch and EBM are not prohibited from doing business with employers in the form of single employer self insured health plans as those activities are outside the scope of the Indiana Department of Insurance and are subject [to] the regulation of federal government agencies.â€ (App.1100.)
However, the Department asserts that EBM has not substantiated its claim that its product or activities, in their entirety, are within ERISA and regulated by the Department of Labor. We agree.
Employee Benefit Managers, Inc. of America v. Indiana Dept. of Ins., 2008 WL 650604 (Ind.App.) (March 12, 2008)
An Indiana appellate court held that the Indiana Department had jurisdiction over a claims administrator’s activities where the practical function was the provision of insurance. This case presents analysis of the oft-cited defense to insurance department regulation, that of ERISA preemption.
EBM was engaged in managing the funding and administration of self-funded employee benefit plans. Upon examination of EBM records, the Indiana Department cited issues which in turn led to an “Agreed Entry “dated July 7, 2004 and a subsequent Agreed Entry dated November 22, 2004.
Under the Agreed Entry arrangement, EBM was required to arrange for the funding and payment of then-unfunded claims as verified by the Special Financial Examiner, amounting to approximately $1,795,000.00. Moreover, EBM agreed:
- to cease offering or administering any health plans in which fees collected from different employers to fund health claims were commingled in depository accounts.
- to provide employers with documents defining the terms and conditions of any claims funding arrangements and/or stop loss insurance policies.
- to have in place a funding source for unfunded claims in an amount no less than $600,000.00 as of thirty days from the date of the Final Order.
On November 22, 2004, the Acting Commissioner issued a Final Order incorporating and adopting the Agreed Entry and EBM’s licenses were placed on probationary status.
At a subsequent hearing, Belch (for EBM) testified that EBM no longer commingled funds from participating employer groups in a single account, and that marketing materials clearly explained the nature of EBM’s programs. Importantly, Belch also testified that EBM was not in compliance with the requirement to arrange for funding and payment of all unfunded claims. Employers’ deposited funds and accounts receivable were being used to pay claims and EBM was pursuing additional funding.
The Insurance Commissioner took the matter under advisement.
At some point following the hearing, EBM deposited $219,000.00 into an account for the payment of unfunded claims; however, the Commissioner issued an order that EBM deposit into that account a minimum of $804,000.00 more before July 8, 2005. By July 15, 2005, EBM was to provide proof that the account funds had been expended for claims payments. Pursuant to a supplemental order issued on July 11, 2005, non-compliance was to result in suspension of EBM’s insurance licenses.
Cease And Desist Order
EBM ultimately failed to satisfy the Department that it was complying with the terms of its agreement.
On January 31, 2006, the Department filed an Emergency Motion for Cease and Desist, alleging that EBM had issued letters to employers suggesting that failure to reimburse EBM for purported loans was a violation that EBM was entitled to redress under authority of state government, specifically the Department. On February 17, 2006, Commissioner Atterholt issued an Emergency Cease and Desist Order/Final Order revoking the licenses held by EBM and Belch and ordering them to not engage in conduct that constitutes the business of insurance without applying for and receiving a certificate of authority to do so. However, the Order provided: â€œBelch and EBM are not prohibited from doing business with employers in the form of single employer self insured health plans as those activities are outside the scope of the Indiana Department of Insurance and are subject [to] the regulation of federal government agencies.â€ (App.1100.) (emphasis in original.)
The Department’s concession to ERISA preemption in the Order is interesting. The jurisdictional basis for the Department’s Order was thus predicated on the following points, as ultimately determined by the trial court.
- EBM and Belch held insurance licenses;
- the terms of the Agreed Entry provided that the Department had jurisdiction over EBM; and
- EBM was producing products that “look and act like insurance”.
The Request For Judicial Review
The Commissioner based his Order upon the substantive findings that claims were not timely paid and employers were misled into believing that a funding source was in place when it was not in place.
EBM filed a petition for review pursuant to Indiana Code Section 4-21.5-5-1 et seq. After a hearing on the matter, the trial court affirmed the Department’s order.
EBM’s ERISA Argument
EBM argued that it is not an â€œinsurance companyâ€ since it did not produce and sell insurance. Rather, it argued, the nature of EBM’s primary business is that of a contract administrator. In this argument, one gets a better insight into the form of contract administration EBM undertook:
An employer who participates in a self-funded employee benefit plan and a funding source execute a contract called a Claims Funding Agreement. There is an additional agreement between EBM and the funding source (â€œan Operating Agreementâ€). The employer sets aside sums of money each month to pay for the medical claims of its employees. When the money set aside is insufficient to fund the medical claims, the funding source loans money to the employer. The loans are repaid over time. EBM administers the contract between the funding source and the employer and acts on behalf of the employer to ensure that claims are paid in accordance with employer Plan Documents.
Thus, according to EBM, the plan operations fell exclusively under the supervisory responsibility of the United States Department of Labor, as the plans are established under ERISA.
A Functional Assessment Of EBM’s Services
The appellate court noted the jurisdictional findings set forth by the trial court and agreed on each point. Further, the court found that the nature of EBM’s activities, though clothed in terms of self-funding of claims, essentially consisted of insurance, stating:
In simple terms, â€œinsuranceâ€ is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from an unknown or contingent event. Meyer v. Bldg. & Realty Serv. Co., 196 N.E. 250, 253-54, 209 Ind. 125, 134 (1935). Here, in light of the fact that EBM commingled employer funds, there was a pooling of assets and sharing of risk among employers. An employee of one of the participating employers who had sustained medical costs would be reimbursed from the pooled resources.
Thus, for all practical purposes, EBM was involved in health insurance as it used a common fund to indemnify persons against contingent events. After EBM had engaged in these activities, it entered into an Agreed Entry with the Department in lieu of immediate license revocation. The objective of the agreement was to protect the â€œinsured.â€ The Department did not lack authority to oversee compliance with the agreement or revoke insurance licenses in the event of non-compliance.
Note: ERISA’s preemption provisions are subject to the savings clause which permits state regulation of the business of insurance among other things. On the other hand, the “deemer” clause circumscribes state regulation.
The saving clause states as follows:
Except as provided in subparagraph (B) [the deemer clause], nothing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities.
The deemer clause states as follows:
Neither an employee benefit plan… nor any trust established under such a plan, shall be deemed to be an insurance company or other insurer, bank, trust company, or investment company or to be engaged in the business of insurance or banking for purposes of any law of any State purporting to regulate insurance companies, insurance contracts, banks, trust companies, or investment companies.
The appellate court’s opinion demonstrates an effort to define a sphere of acceptable state regulation of a TPA that will comport with the strictures of the deemer clause.