Give states more revenue options to fund insurance market stabilization programs
With individual health insurance markets melting down across the country, both the House and Senate health care bills include funding to states to help stabilize their insurance markets. This funding would primarily go to support programs like high risk pools or reinsurance to cover the cost of people with expensive health conditions, which, in turn, would keep premiums down for everyone else.
To continue to receive funding, both the House and the Senate bills require states to start matching a percentage of federal funding. State’s may also find they need to kick more money in to keep markets stable and affordable. Unfortunately, federal law restricts states from raising funds from the ideal source—an assessment on all individual and employer-based health plans.
Specifically, federal law restricts states from assessing self-funded, or self-insured health plans that represents a majority of employer-sponsored health coverage. Any legislation to repeal and replace Obamacare should correct this and allow states to levy assessments on all health plans.
The ideal funding source
Ideally, the funding source for insurance market stability programs would be both broad-based and free from the budget battles states face every year or two.
The funding should be broad-based because the high risks that make their way into the individual market—the source of the individual markets higher risk profile—come from all over. Some high risks were already in the individual market pool, but many others made their way from employer-sponsored group plans. It’s simply not fair to force healthier people who maintain coverage in the individual market to subsidize high risks that migrate into the individual market from employer-sponsored health plans.
Not only is it not fair, it’s not sustainable to shoulder only people in the individual market with this burden when federal law forces insurers in the individual market to cover everyone, regardless of their health status. As we’re seeing now, the expense of these high risks is driving up premiums and pushing healthy people out of the individual market, which drives up premiums even higher.
Insurers also need a stable funding source they can count on from year to year. This is a bit different than funding a general public program that should compete with other public programs for funding. If you want insurers to come to the market and stay in the market, they need to be confident that the funding won’t drop away in the state’s next budget crisis.
ERISA preempts states from assessing self-funded health plans
Obamacare recognized funding for its transitional reinsurance program should be broad-based and so the law applied a reinsurance fee to all commercial health insurance carriers and self-funded major medical plans. Federal law does not allow states to do the same.
The Employee Retirement Income Security Act (ERISA) generally preempts state laws that “relate to” employer-sponsored health plans. States can assess fees on commercial insurance carriers that provide health insurance to employers because the insurer is not itself an employer-sponsored health plan.
However, ERISA preemption blocks states from assessing fees on self-funded health plans because these health plans are funded directly by the employer. This restricts states from assessing fees on the majority of workers in employer-sponsored health plans. According to the Kaiser Family Foundation, 61 percent of covered workers are in self-funded plans.
States can indirectly assess self-funded health plans
Prior to Obamacare, many states funded high-risk pools by imposing assessments on commercial health insurance carriers. To broaden their funding base, some states also assessed fees on stop-loss carriers and third-party administrators (TPAs) that provided services to self-funded plans as a backdoor way to assess these health plans.
But these indirect assessments on self-funded arrangements have always been a second best. First, assessing stop-loss carriers and TPAs fails to capture all health care claims paid by all self-funded health plans. No doubt, an employer could find ways to avoid or minimize these TPA assessments by restructuring its health plan.
Second, the legality of assessing TPAs has always been unclear. Back in 1991, the Fifth Circuit, in E-Systems v. Pogue, preempted a Texas tax on TPAs who received service fees to administer self-funded health plans. More recently, however, the Sixth Circuit, in Self-Insurance Institute of America v. Snyder, affirmed a Michigan assessment on claims paid by carriers and TPAs to fund Medicaid. Notably, the U.S. Supreme Court asked the Sixth Circuit to reconsider their holding in light of Globeille v. Liberty Mutual, a case in which the Supreme Court held ERISA preempts a Vermont requirement on self-insured plans to report claims data to an all-payer claims database. Despite Globeille, the Sixth Circuit reaffirmed the assessment on TPAs in 2016. The Supreme Court then refused to hear the case, making these assessments lawful across the Sixth Circuit.
In light of the recent Sixth Circuit opinion and the fact that contrary opinions predate a landmark Supreme Court ERISA opinion—N.Y. State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co.—that the Sixth Circuit relied on for their holding, it appears likely that states can assess TPAs. Despite this stronger legal position, states outside the Sixth Circuit will still be hesitant to rely on a funding source that remains under a cloud of legal uncertainty no matter how translucent the cloud might be.
Congress should allow states to directly assess self-funded health plans
Options to indirectly assess self-funded health plans are clearly a second-best approach. Employers almost certainly can find ways to circumvent the assessment and the legality of these assessments remains unclear.
Obamacare already required self-funded employers to establish the administrative procedures to pay the temporary reinsurance fee. With the procedures in place, it should not be too burdensome to allow states to impose a similar assessment solely to support their market stabilization programs. All Congress needs to do is add one more “savings clause” to ERISA and save state assessments on self-funded health plans from preemption. Doing so will put states in a much stronger position to shore up their individual health insurance markets without having to come back to Congress to beg for more dollars.