New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel issued the following informal opinion on April 3, 2002 representing the position of the New York State Insurance Department.

Re: Stop-Loss Insurance, Discriminatory Attachment Point

Issue:

May an insurer issuing a stop-loss insurance policy to a self-funded employee welfare benefit plan require a higher attachment point for claims presented on behalf of a specific individual than is generally required under the stop-loss insurance policy?

Conclusion:

No, while such a practice, as it affects the welfare fund, is not violative of the New York Insurance Law (McKinney 2000), it would probably be violative of a Federal statute, the Health Insurance Portability and Accountability Act (HIPAA), Pub. L. No. 104-191 (1996).

Facts:

The Inquirer’s client is a welfare fund established in 1949 by a labor union and contributed to by employers (Fund). The employer’s contribution is a specified amount for each hour worked by union members employed by the employer. The number of union members for which the Fund provides benefits exceeds 750.

In 1959, the Fund commenced providing major medical benefits to its beneficiaries and their dependents. Until 2001, the benefits were provided pursuant to a policy issued by an insurer licensed to transact an accident & health insurance business in New York. In 2001, the Fund decided to self-fund its benefits and contracted with an affiliate of a Health Maintenance Organization holding a Certificate of Authority from the Commissioner of Health pursuant to New York Public Health Law § 4403 (McKinney 2002) for the HMO’s affiliate to provide administrative services to the Fund.

In order to protect itself against claims that could adversely affect the Funds finances, the Fund, at the direction of the Third Party Administrator (TPA), purchased a stop-loss insurance policy from a property/casualty insurer licensed to transact an accident & health insurance business in New York. This policy, which expires March 31, 2002, has an attachment point of $40,000 for any one claim with no aggregate attachment point.

During the period the stop-loss policy has been in force, an individual covered under the Fund underwent major heart surgery and incurred substantial expenses, which were covered by the Fund. The Fund, in turn, anticipates collecting a substantial sum under the stop-loss policy. It is anticipated that the individual in question, who is still in the hospital, will require additional major heart surgery and the Fund will again incur substantial expenses.

The TPA decided to again put the stop-loss coverage out for bid and only one insurer, a domestic life insurer, both bid on the coverage and has an acceptable financial and claims rating. The prospective policy, which will be effective April 1, 2002, will generally retain the $40,000 attachment point, except for the individual who incurred the substantial expenses because of her heart surgery and will require further heart surgery. As to this individual, who is specifically named in the policy, the attachment point will be $500,000.

The Inquirer wishes to know if the insurer’s actions are violative of any statute or regulation.

Analysis:

While the Fund was initially authorized pursuant to the Labor-Management Relations Act of 1947, 61 Stat. 136 (Taft-Hartley Act), when the Employee Retirement Income Security Act, Pub. L. No. 94-12 (1974), (ERISA) was enacted, it became subject to ERISA. The Fund is an employee welfare benefit plan, as that term is defined in ERISA, 29 U.S.C.A. § 1002(1) (West 1999):

The terms ‘employee welfare benefit plan’ . . . mean any plan, fund, or program which was heretofore or is hereafter established or maintained by . . . an employee organization . . . to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits . . . .

As an employee welfare benefit plan, the Fund is subject to ERISA, 29 U.S.C.A. § 1003(a) (West 1999).

It has long been the position of this Department that stop-loss insurance policies issued to self-funded employee welfare benefit plans providing health benefits are deemed to be health insurance, not reinsurance. This characterization of stop-loss insurance was formally conveyed to the insurance industry by Circular Letter No. 7 of 1982, issued on April 13, 1982, and codified in New York Insurance Law § 4237-a (McKinney 2000).

In 1993, the New York Legislature enacted, 1993 N.Y. Laws 695, New York Insurance Law § 3234 (McKinney 2000) to prohibit an insurer from issuing a stop-loss policy to a self-funded group which discriminates because of specific disease or condition. Since the Fund itself is not intending to discriminate, the prohibitions of New York Insurance Law § 3234 would not be applicable.

HIPAA, however, imposed restrictions on employee welfare benefits plan and health insurers in this area, which has been codified, inter alia, in ERISA:

In general. . . . a group health plan, and a health insurance issuer offering group health insurance coverage in connection with a group health plan, may not establish rules for eligibility (including continued eligibility) of any individual to enroll under the terms of the plan based on any of the following health status-related factors in relation to the individual or a dependent of the individual: (A) Health status. (B) Medical condition (including both physical and mental illnesses). (C) Claims experience. (D) Receipt of health care. (E) Medical history. (F) Genetic information. (G) Evidence of insurability (including conditions arising out of acts of domestic violence). (H) Disability.

29 U.S.C.A. § 1182(a)(1) (West 1999)

A "health insurance issuer" is defined, 29 U.S.C.A. § 1191b(b)(2) (West 1999):

The term ‘health insurance issuer’ means an insurance company, insurance service, or insurance organization (including a health maintenance organization, as defined in paragraph (3)) which is licensed to engage in the business of insurance in a State and which is subject to State law which regulates insurance. Such term does not include a group health plan.

It is the belief of this Department that an insurer that issued a stop-loss insurance policy with an attachment point such as described, would be violative of the above HIPAA prohibition. The Inquirer may wish to contact the Pension and Welfare Benefit Administration of the United States Department of Labor, which enforces ERISA, for further information.

For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.