MEWAsThe Threat of Plan Insolvency and Other Challenges3insolventcon - PDF document

1 MEWAs:The Threat of Plan Insolvency and
MEWAs:The Threat of Plan Insolvency and Other Challenges3insolvent,consumers generally are not responsiblefund will pay claims.But MEWAs generally areexcluded from participating in guaranty funds,andtherefore do not have to pay the assessmentsrequired to finance them.When a MEWAbecomes insolvent,patients and,in some cases,employers,are responsible for unpaid medical bills.Furthermore,some states’receivershiplaws—which allow the insurance department totake over financially failing insurance companies—either exclude MEWAs or are vague about thedepartment’s authority to assume control over one(for example,California).Typically,the insurancedepartment or an independent receiver liquidatesan insolvent insurance company,uncovering assetsin order to pay claims.A receiver may also negoti-ate with health care providers on behalf of patientsto accept a reduced fee when the amount in assetsis insufficient to cover 100 percent of the claims.This greatly benefits consumers who otherwisewould be responsible for unpaid medical bills.Absent a receivership,licensed,self-insuredMEWAs can end up in bankruptcy court—a devel-sumers.Unlike state receiverships,bankruptcy courtsdo not pay outstanding medical claims first;somecreditors may be paid prior to patients and providers.The effects of insolvency have been bothserious and widespread.Individuals and familiescovered by self-insured MEWAs are left withfor some,this

2 means financial ruin.Hospitals anddocto
means financial ruin.Hospitals anddoctors,meanwhile,face the burden of finding waysto finance the uncompensated care or bestuck with it.Some of the cost of uncom-pensated care is shifted to insured patients inthe form of higher fees,which in turn canlead to increases in insurance premiums.The proposed federal legislation toencourage the growth of association healthplans would exempt such plans from stateregulation,thereby making it less expensivefor them to offer health coverage.Although thelegislation would establish solvency requirements,these would be less stringent than what statesrequire for insurers.This means that self-insured,group purchasing arrangements that are subject tolow federal solvency standards would be allowed tooperate in the majority of states that currently pro-hibit such entities unless they are licensed as insur-ers.In some cases,the proposed standards wouldalso be less stringent than the state standards cur-rently applicable to self-insured MEWAs.OVERNINGMEWABoth states and the federal government currentlyregulate MEWAs,although this was not alwaysthe case.Evolution of Federal and State RegulationWhen Congress federalized regulation of employeebenefits by enacting the Employee RetirementIncome Security Act of 1974 (ERISA),it severelyrestricted states’authority to regulate group pur-chasing arrangements.Under the original statute,states could not regulate group purchasin

3 g arrange-ments considered to be an “emp
g arrange-ments considered to be an “employee welfare ben-The U.S.Departmentof Labor,rather,became responsible for regulatingsuch arrangements.To determine if an arrangementwas an ERISA plan,a state (and in many cases acourt) had to apply a very technical and complexfederal standard requiring a fact-intensive inquiry.ERISA replaced state-based standards withminimal federal standards to encourage employersto provide medical benefits to their workers.Thefederal statute required ERISA health plans to Table 1.Consumer Protections for Insurers and MEWAs in California,Michigan,and Oklahoma Consumer ProtectionsInsurersMEWAsSolvency StandardsYesYes,weaker*Guaranty Associations/FundsYesNo ReceivershipsYesYes*** Standards applicable to MEWAs are less stringent than those applicable** In California,according to state regulators,the receivership law is vagueabout the Insurance Department’s authority to takeover a licensed MEWA. MEWAs:The Threat of Plan Insolvency and Other Challenges5 Table 2.Solvency Standards for MEWAs Solvency LawsCaliforniaMichiganOklahomaMaintain surplus of $1 millionNoneMaintain surplus of $200,000in 2003 ($4 million by 2007)in cash or federally guaranteed obligations with less than five-year maturityAppropriate loss and lossMaintain minimum cashMaintain reserves not less than adjustment reservesreserves of not less than 25%greater of 20 percent of total determined by soundof aggregat

4 e contributions incontributions of prece
e contributions incontributions of preceding actuarial principlescurrent fiscal year or not lessplan year or 20% of total than 35% of claims paid inestimated contributions for preceding fiscal year,current plan yearwhichever is greater(Cash reserves must be held as“restricted asset”in separatecommingled with any of MEWA’s other funds)SpecificSpecific attachment point notAmount must first be approved Specific attachment point as greater than 5% of annualby commissionerannually indicated in actuarial expected claims– If policy has specificopinionretention of no more than$25,000,commissioner– If higher specific retentionrequested,it must be approvedby commissionerAggregateAggregate attachment point notIf commissioner deems Aggregate attachment point greater than 125 percent ofnecessary on case-by-case basis;not greater than 125 percent annual expected claimsotherwise no requirementof annual expected claimsOther StandardsMust be purchased through Must be purchased through insurer authorized to do insurer authorized to do business in statebusiness in stateAnnualAudited financial statementsAudited financial statementsAudited financial statementsReport certifying sufficient reservesReport of financial condition submitted to all employersQuarterlyUnaudited financial statements Unaudited financial statements Commissioner may require Report certifying sufficientReport certifying sufficient quarterly repo

5 rtingreserves and stop-loss insuranceres
rtingreserves and stop-loss insurancereserves and stop-loss insuranceMEWA in financiallyMonthlyMonthlyCommissioner may require hazardous conditionquarterly reporting Filed prior to useFiled prior to useFiled prior to useDisclose state guaranty associationDisclose state guaranty associationDisclose state guaranty associationdoes not protect enrollees in casedoes not protect enrollees in case does not protect enrollees in case of MEWA insolvencyof MEWA insolvencyof MEWA insolvencyDisclose guaranty association doesDisclose enrollees may be liable not pay for claims in case offor outstanding medical expenses MEWA insolvencyMEWAs that use TPAs must useMEWAs that use TPAs must use MEWAs that use TPAs must use licensed/authorized TPAslicensed/authorized TPAslicensed/authorized TPAsFeasibility study made byqualified actuary showing MEWA would not,at any month’s end of the projection period,have less than 90% of reservesSources:Cal Ins Code § 742.24 to § 742.34;MCLS § 500.7011 to § 500.7044;36 Okl.St.Ann §633 to §639;Interviews withstate insurance regulators from California (February 4,2003),Michigan (January 30,2003),and Oklahoma (January 31,2003). MEWAs:The Threat of Plan Insolvency and Other Challenges7against participating employers,security,orother financial arrangements).For example,if a small business promises to contribute toa trust account when a plan does not collectenough to cover all claims

6 ,then such apromise could be a substitut
,then such apromise could be a substitute for having theminimum $500,000 in surplus.Allowing aplan to have no cash in surplus,however,increases the risk of insolvency.This is especially sobecause many small businesses may not have thefinancial resources to pay potentially hundreds ofthousands of dollars to make up a shortfall,in addi-tion to paying the premiums they would have paid.California,Michigan,and Oklahoma requireMEWAs to purchase stop-loss insurance to protectagainst unexpectedly large claims or a high fre-policy agreed upon by the MEWA and the stop-loss insurer is generally based on an estimate of theMEWA’s expected claims.Because MEWAs aretypically small entities compared with insurers,expected claims are often difficult to estimate withaccuracy.For this reason,regulators believe thatstop-loss “attachment points”—the dollar require-ments at which stop-loss insurance is triggered fora specific individual—should be low to prevent aMEWA from exhausting its reserves and surplus.While stop-loss insurance protects theMEWA when it miscalculates claims,it does notprotect the consumer in a case of a MEWA insol-vency.Stop-loss insurance will pay only for theportion of medical claims that exceeds what theMEWA agreed to pay.If a MEWA’s expectedclaims are $1 million and its aggregate stop-losscoverage is set to begin once actual claims reach110 percent of expected claims,then the MEWAis responsibl

7 e for $1.1 million.If a MEWA cannotpay t
e for $1.1 million.If a MEWA cannotpay this amount,then employers and patients ulti-mately become responsible for it.The federal proposal would require thataggregate stop-loss coverage begin at 125 percentof expected claims (Table 3).However,this ceilingcan be raised when a MEWA has in reserve anamount that is higher than required—therebyexposing the plan to even greater financial risk.The legislation does not set a specific (or an indi-vidual) attachment point that would protect theplan from high claims an individual may incur.In addition to enacting standards for thetype of stop-loss coverage,both Michigan andOklahoma require MEWAs to purchase suchcoverage from an insurer authorized to do businessin their states.This requirement seeks to addressthe problem of off-shore and,in some cases,fly-by-night stop-loss insurers not paying claims.The proposed federal legislation does not requireFiling RequirementsTo help regulators monitor the financial conditionof licensed MEWAs,all three states requireMEWAs to file annual financial statements auditedby a certified public accountant.Oklahoma alsorequires MEWAs to submit a report of its financialcondition to employer members on a yearly basis.Additionally,plans in California and Michiganmust file unaudited financial statements on a quar-terly basis,including a report certifying that suffi-cient reserves are held.Major changes in assets andliabilities ind

8 icated in these quarterly reports helpre
icated in these quarterly reports helpregulators to identify potential problems early.To more closely monitor MEWAs’financialstatements,California has designated an experi-enced financial examiner to review annual andquarterly reports filed by MEWAs.In some cir-cumstances,an in-house actuary also reviews suchstatements.Michigan has an auditor to perform Table 3.High vs.Low Aggregate Stop-Loss LevelsExpectedStop-Loss SetStop-Loss Set Claimsat 110 Percentat 125 Percent$1 millionMEWA will beMEWA will be responsible for the firstresponsible for the first $1.1 million worth of$1.25 million worth of claims before stop-lossclaims before stop-loss policy is triggeredpolicy is triggered MEWAs:The Threat of Plan Insolvency and Other Challenges9Regulators in Oklahoma,for example,require applicants to submit a marketing plan todetermine whether information in the applicationaccurately reflects the true nature of the arrange-ment.In one instance,Oklahoma denied licensingto an arrangement because its application statedthat coverage would only be available to smallbusiness members while its marketing plan indi-cated that insurance agents would sell coverage toindividuals.In another Oklahoma case,an investi-gation revealed that an arrangement was set up bya company for no other purpose than to sell healthinsurance to consumers.The arrangement did notqualify for licensing because one criteria is that thearrang

9 ement must engage in activities other th
ement must engage in activities other thanselling health insurance.In California,an extensiveprelicensing investigation resulted in the denial oflicenses to five of 12 arrangements that applied forcertification.According to the regulators,a highlevel of scrutiny has helped ensure that only quali-fied arrangements meeting all requirements receivea license.Ongoing OversightAccording to state regulators,hands-on monitoringis needed to detect financial problems early.ManyMEWAs operate close to the margins;any miscal-culation in premiums or claims can lead to insol-vency,especially in light of the low surplus cushion.Small changes in the market—for example,higherprescription drug costs or changes in claims pat-terns—affect MEWAs more than traditional insur-ers.In Michigan,a MEWA became insolventsimply because of an unexpected claim related toneonatal twins.Frequent monitoring and hands-onoversight requires significant resources.Michigan,for example,assigns the equivalent of one full-timeemployee to regulate each self-insured MEWA.Independent Financial AnalysisIn California,Michigan and Oklahoma,financialreports filed by a MEWA must be certified by acertified public accountant.Also,an actuary mustcertify that surplus and reserves are adequate tomeet a MEWA’s liabilities.Some regulators believe,however,that actuarial certification is not alwaysreliable,because actuaries base their analysis on theMEWA’s

10 own information,which may be incom-plet
own information,which may be incom-plete or flawed.In addition to careful reviews offinancial statements,Michigan conducts onsiteInsolvencyBecause even the most aggressive oversight cannotprevent a MEWA’s insolvency,states provide vari-ous forms of assistance to consumers in such cases.Michigan’s insurance department has taken the fol-lowing actions that have proved effective:companies to cover employers.Negotiated with insurers to fully insure theMEWA.Because state regulations ensure thesolvency of the insurance company,the MEWAis not at risk of financial failure.Negotiated with the professional and trade asso-ciations sponsoring the MEWA to make up forthe financial short fall.Requested that the sponsoring association workout agreements with health care providers toaccept reduced payment on outstanding claimsand agree not to seek the remainder fromThese strategies assist employers in findingnew coverage and reduce the amount of unpaidmedical bills for which patients are responsible.The law did not require any of these actions;rather,these reflect the commitment and effective-ness of regulators.MPLICATIONSInsolvencies of self-insured associations present amakers.Although some of these associations havehelped employers finance health benefits for theiremployees,many have become insolvent and leftthousands of workers and employers with unpaid MEWAs:The Threat of Plan Insolvency and Other Challeng

11 es11(1992) (hereinafter Although there w
es11(1992) (hereinafter Although there were no changes to the Department’sjurisdictional authority,it now believes that it hasbroad authority to investigate arrangements that arenot ERISA-covered plans when they handle ERISAplan assets,which occurs when employers covered byERISA participate in the arrangement.See p.5.ERISA § 3(40),29 U.S.C.§ 1002.U.S.Department of Labor,Pension and WelfareBenefits Administration,AO 90-18A (1990) (letter toJ.Scott Kyle,Texas State Board of Insurance).The registration requirement was enacted in 1996.Inaddition to these requirements,Health InsurancePortability and Accountability Act rules amendedERISA and therefore apply to MEWAs.Stop-loss insurance is not subject to the rules appli-cable to health insurance,including guaranteedrenewability.Additionally,regulators suggested that one way tominimize the risk of insolvency is to require stop-lossinsurance companies to perform an assessment on aMEWA’s liabilities before they issue a policy.According to regulators,this is already a commonpractice in workers’compensation insurance.Anindependent review of the financial soundness of aMEWA could perhaps help reduce the risk of insol-vency.Still,stop-loss insurance does not protect cov-ered individuals when a MEWA is insolvent.Interview with Fred Nepple,General Counsel,Wisconsin Insurance Department (and Chair of theNAIC ERISA Working Group),February 18,2004.See Small Busine

12 ss Health Fairness Act of 2003,H.R.660,s
ss Health Fairness Act of 2003,H.R.660,section 807(e).See Small Business Health Fairness Act of 2003,H.R.660,section 807(f).BOUTTHEMila Kofman,J.D.,is an assistant research professor at Georgetown University’s Health Policy Institute.Beforejoining the faculty at Georgetown,she was a federal regulator with the U.S.Department of Labor,where sheworked on federal legislation related to multiple employer welfare arrangements in addition to regulating sucharrangements.Previously,Ms.Kofman was Counsel for Health Policy and Regulation at the nonpartisanInstitute for Health Policy Solutions,where she helped small businesses establish health insurance purchasingcoalitions.She has also worked for the National Association of Insurance Commissioners.Eliza Bangit,M.A.,a researcher with the Health Policy Institute,concentrates on private health insurance plansand markets,managed care consumer protections,and federal and state health insurance market reforms.Kevin Lucia,M.H.P.,researcher also with the Health Policy Institute,focuses on federal and state reformsrelating to the private health insurance markets. The Commonwealth Fundis a private foundation supporting independent research on health andsocial issues.The views presented here are those of the authors and should not be attributed to TheCommonwealth Fund or its directors,officers,or staff,or to members of the Task Force on the Futureof Health Insurance.